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Tax Compliance for Tax Compliance for International Students International Students & Scholars & Scholars Gary Carter Gary Carter University of Minnesota University of Minnesota

Us Tax Compliance For International Students And Scholars

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Page 1: Us Tax Compliance For International Students And Scholars

Tax Compliance for Tax Compliance for International Students & International Students &

ScholarsScholars

Gary Carter Gary Carter University of MinnesotaUniversity of Minnesota

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Who Is An Alien?Who Is An Alien?

An “alien” is anyone who is not a citizen of the U.S., either by birth or naturalization

A “resident alien” is taxed the same as U.S. citizens (except some can still get treaty benefits)

A “nonresident alien” is anyone who• has not been granted permanent resident status by

the INS (the “green card” test), and • has not passed the “substantial presence” test

See page 4 of Publication 519 This test does not apply to an “exempt individual”

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Who Is a Nonresident Alien? Who Is a Nonresident Alien? Exempt IndividualsExempt Individuals

An “exempt individual” does not count days present in the U.S. toward the substantial presence test

Exempt individual defined: • A teacher or trainee on a J-1 or Q-1 non-student visa

for the first 2 calendar years in the U.S.• A student on an F-1, J-1, M-1 or Q-1 visa for the first

5 calendar years in the U.S. • Family members on F-2, J-2, M-2 or Q-2 visas fall

under the same rules Before and after the period of exemption the

individual is subject to the SPT

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Who Is a Resident Alien?Who Is a Resident Alien?

A student (F or J visa) present in the U.S. longer than 5 calendar yrs who passes the substantial presence test

A teacher or researcher (J visa) present in the U.S. longer than 2 calendar yrs who passes the substantial presence test

A nonresident or dual-status alien who is married to a resident at yr end & elects to be treated as a resident for the whole yr

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Resident vs Nonresident Resident vs Nonresident Examples Examples

1) Sam, an F-1 (student) visa-holder arrived in the U.S. on June 1, 2000. Is he a resident or nonresident in 2004?• Nonresident

2) Sam’s wife came with him on an F-2 visa. She has a job and is not a student. Is she a resident or non-resident in 2004?• Nonresident

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Resident vs Nonresident Resident vs Nonresident ExamplesExamples

3) Juanita, a J-1 (teacher) visa-holder arrived in the U.S. on December 30, 2002. She has remained in the U.S. continuously. Is she a resident or nonresident in 2004?• Resident

4) Joan, in the U.S. on an F-1 (student) visa, is married to Bob who received a green card in 2004. If they elect to file a joint return, is Joan a resident, nonresident, or part-year resident? • Resident

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Dual-Status AliensDual-Status Aliens

Part yr nonresident & part yr resident Must follow special filing requirements Most commonly occurs when the taxpayer

• Enters the U.S. and passes substantial presence test in the year of arrival.

• Is an exempt individual and receives permanent resident status during the year.

• Leaves the U.S. after passing the substantial presence test for the year of departure.

These taxpayers should get professional help

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The Nonresident Alien ReturnThe Nonresident Alien Return

Either Form 1040NR or Form 1040NR-EZ• Must be filed by NR alien on F, J, M & Q visa who has any income subject to tax

• Due April 15 if taxpayer had taxable wages• Due June 15 if no taxable wages

All “exempt individuals” must file Form 8843 even if they have no income

Sent to special address: Internal Revenue Service Center, Philadelphia, PA 19255

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What Is Needed From What Is Needed From The TaxpayerThe Taxpayer

Make sure taxpayer has taxpayer identification number (ITIN or Social Security number)

Have taxpayer complete Form 8843 • Helps to determine residency status

Ask for taxpayer’s income statements• Forms W-2 for wages• Forms 1099 for interest & dividends• Form 1042-S for scholarships & treaty exempt income

If no ITIN taxpayer must attach Form W-7 to return and apply with IRS or Acceptance Agent

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The Return Preparation ProcessThe Return Preparation Process

Determine residency status Check treaty provisions in IRS Pub. 901 Prepare Form 1040NR or Form 1040NR-

EZ Prepare MN Form M-1 & Form M-1PR Check social security withholding

• Provide Form 843 if relevant Have return reviewed

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Form 1040NR or Form 1040NR or Form 1040NR-EZ?Form 1040NR-EZ?

Form 1040NR always works Form 1040NR-EZ can be used when

• Taxpayer claims only one exemption• Taxpayer has no investment income other

than bank interest (not taxable)• Taxable income is < $50,000• Taxpayer does not have IRA or moving

expense deductions • Only itemized deduction is state income tax

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How Nonresident Aliens How Nonresident Aliens Are Generally TaxedAre Generally Taxed

Generally only U.S. source income is taxed Foreign source income is not taxed unless

connected with a U.S. trade or business Treaty provisions exclude some income Deductions, exemptions & credits are limited No standard deduction except for students &

business apprentices from India Married taxpayers cannot file joint returns

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Effectively Connected vs Not Effectively Connected vs Not Effectively Connected IncomeEffectively Connected Income

Effectively connected with a U.S. trade or business• Includes wages and U.S. sourced scholarships• Reported on page 1 of Forms 1040NR or NR-EZ• Taxed at graduated rates after deductions

Not effectively connected income• Investment income (interest, div., cap. gain)• Reported on page 4 of Form 1040NR• Not shown on page 1• Taxed at flat 30% or lower treaty rate with no

deductions allowed - See Pub. 901, Table 1

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Filing Status for Filing Status for Nonresident AliensNonresident Aliens

No joint returns for nonresidents• If married to a citizen or resident, a

nonresident can elect to file a joint Form 1040 and be treated as a resident

• Other married nonresidents must file as MFS Head of household status is unavailable Qualifying widow(er) status is available for

Canadians, Mexicans, Japanese & Koreans

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Personal & Dependency Personal & Dependency ExemptionsExemptions

Exemption amount for 2004 = $3,100 Generally only one allowed for

nonresidents Mexicans & Canadians use the same rules

as U.S. residents• Allowed for spouse with no gross income • Allowed for dependent children• Spouse & children need not live with taxpayer

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Personal & Dependency Personal & Dependency ExemptionsExemptions

Japanese & South Korean residents allowed exemptions for spouse &/or children• Those claimed must live with taxpayer in the U.S. at

some time during the year• Exemption amount is prorated between effectively

connected U.S. gross income and gross worldwide income - See Pub 519, p. 22

Indian students can claim an exemption for a spouse with no gross income, & children who are citizens or residents

An ITIN must be shown for all exemptions

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Personal & Dependency Personal & Dependency Exemptions: ExamplesExemptions: Examples

5) Boris is a J-1 nonresident in the U.S. from Russia. His wife and 2 minor children live with him and have no income. How many exemptions can Boris claim?• 1 for himself

6) Ed is an F-1 nonresident in the U.S. from Canada. His wife and 2 minor children live in Canada and have no income. How many exemptions can Ed claim? • 4 for himself, wife and children (all must have ITINs)

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Personal & Dependency Personal & Dependency Exemptions: ExamplesExemptions: Examples

7) Sham is a nonresident in the U.S. from India on a J-1 student visa. His wife and 2 minor children accompanied him on J-2 visas and have no income of their own.

How many exemptions can Sham claim?• 2 for himself and his wife (both must have ITINs)

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Wages & Self-employment Wages & Self-employment IncomeIncome

Generally taxable if earned in the U.S.• W-2, box 1 amount is reported on Form

1040NR-EZ line 3 or Form 1040NR line 8• Self-employment income is reported on Form

1040NR line 21 or 13 (attach Schedule C-EZ) Special exclusions for U.S. income

received from foreign employers

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Tax Treaty Provisions in Tax Treaty Provisions in General: Pub. 901General: Pub. 901

Treaties override U.S. tax law to exempt income or impose lower rates

Pub. 901 provides summaries of provisions• Table 1 (page 31): rates on NECI

(investments)• Table 2 (page 34): exemptions for ECI

More details are provided for each country• Beginning on page 14 for teachers &

researchers• Beginning on page 17 for students

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Wages & SE Income Wages & SE Income Excluded by TreatyExcluded by Treaty

See Pub. 901, Table 2, page 34• Independent personal services = self-

employment income• Dependent personal services = wages• Compensation during training = wages• Note payor requirement in treaty provision • Generally shown on taxpayer’s Form 1042-S• Not included in total compensation• Reported only at:

Form 1040NR, line 22 & page 5, Item M Form 1040NR-EZ, line 6 & page 2, Item J

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Wages & Self-employment Wages & Self-employment Income: ExamplesIncome: Examples

8) Reggie is an F-1 nonresident in the U.S. from Canada. In 2004 he earned $9,500 in wages as a teaching assistant. How are his wages treated on his U.S. tax return?

9) Roberto is a J-1 student nonresident who entered the U.S. from Italy in 2002. In 2004 he earned $10,000 as a teaching assistant. How are his wages treated on his U.S. tax return?

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Scholarship & Fellowship Scholarship & Fellowship GrantsGrants

Generally taxable if from U.S. payor Shown on taxpayer’s Form 1042-S Reported on Form 1040NR-EZ, line 5 Reported on Form 1040NR, line 12 Code exclusion for “qualified scholarship”

• Student must be a candidate for a degree• Payment must be for tuition, books or supplies• Exclusion reported on Form 1040NR-EZ, line 9• Exclusion reported on Form 1040NR, line31• Statement must be attached to return

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Scholarship & Fellowship Scholarship & Fellowship Grants Excluded by TreatyGrants Excluded by Treaty

See Pub. 901, Table 2, page 34• Must be from U.S. payor

• Must not represent payment for services

• Generally shown on Form 1042-S

• Do not report in total scholarship income

• Reported only at: Form 1040NR, line 22 & page 5, Item M Form 1040NR-EZ, line 6 & page 2, Item J

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Scholarship & Fellowship Scholarship & Fellowship Grants: ExamplesGrants: Examples

10) Francine is a nonresident French student who came to the U.S. to study in 2001. She received a $15,000 scholarship in 2004. How should she report the scholarship?

11) Dan is a nonresident student from Denmark. He received a $12,000 scholarship in 2004 to pay for his tuition. How should he report the scholarship?

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Interest, Dividends & Capital Interest, Dividends & Capital Gain IncomeGain Income

Generally taxable if from a U.S. payor Bank interest is excluded (show on page 5 of

Form 1040NR, item L) Taxable amounts are reported on page 4 of

Form 1040NR, not line 9, 10 or 14 of page 1 Tax is generally 30% of gross unless a treaty

provides a lower rate See Pub. 901, Table 1, page 31 for lower treaty

rates

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More ExamplesMore Examples

12) Frank is a student in the U.S. since 2000 on an F-1 visa from Finland. In 2004 he received a $2,000 grant from his home country for living expenses. He also got a $12,500 scholarship from his school which included $2,500 for teaching, $6,000 for tuition and $4,000 for living expenses. He also received bank interest of $300. How are these items reported on Frank’s return?

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More ExamplesMore Examples

13) Beth is a nonresident from Belgium in the U.S. on an F-1 visa to study for her master’s degree. She receives a $6,000 scholarship from her university that pays her room & board. She is not required to perform services to receive the money. She also recognized $5,000 in capital gain from the sale of U.S. stocks. How should Beth treat the scholarship and the capital gain?

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More ExamplesMore Examples

14) Julie is an F-1student from France, arriving in 2004, who received a $10,000 fellowship from the U of M to serve as a teaching assistant. How is the income treated for U.S. tax purposes?

15) Frederick is on a J-1 visa, entering from Germany in 2002 to teach and do research at the U of M. He plans to stay 3 yrs and is paid $15,000 per yr. How is his income treated on his U.S. tax return?

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More ExamplesMore Examples

16) Mary is on a J-1 visa from the United Kingdom to teach at the U of M, arriving in 2003. She plans to stay 3 yrs and is paid $15,000 per yr. How is her income treated on her U.S. tax return?

17) Ed is a J-1 nonresident from Canada doing post-doctorate work at the U of M. He receives $12,000 in wages as a TA. Is his income taxable on his U.S. tax return?

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Deductions Allowed Against Deductions Allowed Against Effectively Connected IncomeEffectively Connected Income

Limited itemized deductions• See Schedule A, page 3 of Form 1040NR• Only state income tax for Form 1040NR-EZ

IRA contribution - 1040NR line 24, page 1 Moving expenses -1040NR line 27, page 1 Student loan interest

• For school costs incurred at the time of the loan reduced by qualified scholarship

• Limit for 2004 is $2,500• Not available to married nonresidents

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Deductions Allowed Against Deductions Allowed Against Effectively Connected IncomeEffectively Connected Income

The standard deduction• Generally not available to nonresident aliens• Exception:Indian students & apprentices only

Claimed in lieu of any itemized deductions Amount = $4,850 for Single; $4,850 for MFS Form 1040NR

• Shown on line 3 of Schedule A - write to the left “Standard deduction allowed under U.S./India tax treaty”

• Also shown on line 35 instead of itemized deductions Form 1040NR-EZ: Amount is shown on line 11

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State IssuesState Issues

Income TaxIncome Tax• Use Form M-1 (no special form for NR aliens)Use Form M-1 (no special form for NR aliens)• Start with federal taxable income on line 1Start with federal taxable income on line 1• On line 2 must add state tax deducted on Form On line 2 must add state tax deducted on Form

1040NR-EZ, line 11 (or Form 1040NR, Sched. 1040NR-EZ, line 11 (or Form 1040NR, Sched. A)A)

Property Tax RefundProperty Tax Refund• Form M-1PR can be filed by MN residentForm M-1PR can be filed by MN resident• Add nontaxable income on line 5Add nontaxable income on line 5• Use CRP from landlord for line 9Use CRP from landlord for line 9

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Social Security WithholdingSocial Security Withholding

Nonresident aliens holding F, J, M & Q visas are exempt from social security tax• Exemption applies only to -1 visa holders• Family members on -2 visas are not exempt

Separate exemption for regular students• Applies to residents as well as nonresidents• Family members on -2 visas might qualify

Form 843 is filed to claim refund• Tax is sometimes withheld by mistake• See Pub. 519, page 43 for refund procedures