international students and scholars. lesson 1 determination of residency status
TRANSCRIPT
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International Students and Scholars
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Lesson 1
DETERMINATION OF RESIDENCY STATUS
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Determinationof Residency Status
• Do not confuse tax residency with:– immigration residency– residency for tuition purposes– residency requirements for
earning a degree etc.
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Resident or Nonresident?
• Substantial Presence Test• Exempt Individual• Green Card Test• Residency Through Marriage• Dual-Status Alien
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Substantial Presence Test
• 31 days during the current year, and
• 183 days during the three year period that includes the current year and the two years immediately before that counting:– current year times 1, plus– first preceding year times 1/3, plus – second preceding year times 1/6.
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Exempt Individuals
• F, J, M, & Q student status holders• J & Q teacher or trainee status
holders• Not exempt from taxation.
Exempt from counting days of presence for a specified period of time.
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Exempt students (F & J)
• 5 years• Dependents are included if
their status is derivative and they are dependent on the main status holder
• All must file an 8843
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Exempt teacher/trainee
• Any two years out of a six year period
• Must count years in student or trainee status
• Dependents are included if their status is derivative and they are dependent on the main status holder
• All must file an 8843
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Establishing a closer connection
• Can ignore the substantial presence test if:– are present in the U.S. less than
183 days in the current year, – have a tax home in a foreign
country for the entire year and closer ties with that country than the U.S., and
– file form 8840.
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Green Card Test
• Date of adjustment to status--not the date pink ‘green card’ issued
• No option--if you are a Permanent Resident, you are a resident for tax purposes
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Residency Starting Date
• Passes Substantial Presence Test (SPT)– First day of the tax year the SPT is passed
• Granted permanent residence status--green card test– First day in the U.S. as permanent resident
• When both apply: the earlier of the two
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Residency through marriage
• Nonresident spouse treated as a resident
• May file as residents, but required to file a statement, signed by both, and
• Required to file jointly, and• Report world-wide income
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Dual-status Aliens
• Can be very complex• Applies when taxpayer has two
residency statuses during the same tax year
• Refer to professional preparer
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Lesson 2
WHO MUST FILE
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Who Must File
• In the United States, unlike most of the world, it is the individual’s responsibility to know what taxes must be filed with the government.
• Most of the world, the government automatically assesses and collects taxes.
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Resident Aliens
• File just as United States citizens file
• See IRS Publication 17 or any of the numerous VITA sites for U.S. citizens
• Extensive number of resources, public and private, for help with tax obligations
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Dual Status Aliens
• See IRS Publication 519 for a detailed description of this status and examples of how to file.
• Too complex for this training, encourage dual status aliens to seek professional help with their tax questions.
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How nonresident is different
• Generally pay tax only on US-source income
• Interest may be tax free• Married nonresidents cannot file
jointly• Generally only one personal
exemption• Most tax credits do not apply• Standard deduction not allowed
(except students from India)
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Nonresident Rules
• Itemized deductions limited to:– state and local taxes withheld– contributions to charity– casualty/theft losses– miscellaneous business deductions
• Investment income (other than interest) is generally taxed at a flat 30%
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Nonresident Aliens Filing Requirements
• Who– All F, J, M, and Q status holders must
file a statement to substantiate non-residence and possibly a tax return
• What– Form 8843—mandatory for all
nonresidents– Possibly Form 1040NR or 1040NR EZ
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• When– Tax returns by 15 April
•Form 1040NR or Form 1040NR EZ
– Form 8843 only by 15 June
• Where– Internal Revenue Service Center– Philadelphia, PA 19255-0219
When and Where to File
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1040NR-EZ instead of 1040NR
• Does not claim dependents• Cannot be claimed as someone’s
dependent• Under 65• Only wages, salaries, tips, taxable
refunds of state/local income taxes, & scholarships or fellowships--all other income on 1040NR
• Taxable income <$50,000
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• Cannot claim any adjustment to income except scholarship & student loan interest
• Cannot claim tax credits• No exemption claimed for spouse• If itemizes, can only claim state
income tax deductions• The only taxes owed are income
taxes
Additional limitations of Form 1040NR-EZ
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Consequences of Failure to File
• If no taxes are owed--no penalty.– Although, Form 8843 always
required
• However, nonimmigrant alien status requires that the individual not violate any U.S. laws—including tax laws.
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Lesson 3
TREATY OVERVIEW
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Treaty Overview
• IRS Publication 901 your simplest resource for details of treaties
• Treaties can exempt income that are classified as scholarship or compensation for teaching or during studies– File IRS Form 8233 with payer to
exempt income from withholding
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• Purpose is based on immigration status! (A graduate student teaching classes is a student and not teacher.)
• Student/scholar must have been tax resident of treaty country immediately prior to coming to U.S. for purpose on current INS documents.
• Dependent and Independent Personal Services rarely allowed for students and scholars—see Canada exception.
• Clarification--read the text in Pub 901
Points to Consider When Determining Treaty
Application
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IRS Income Codes on 1042S
• 15 Scholarship or Fellowship grants– Qualified (unreported and untaxed):
tuition, mandatory fees, and maybe books
– Nonqualified (reported and taxed, if not exempt by treaty): room and board and uncontrolled payments
• 18 Compensation for teaching and research
• 19 Compensation during study and training
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Unique Treaty Provisions
• India– Standard deduction and exemptions
for spouse and dependents (always read dependents)
• Canada– $10,000 dependent personal services if
it does not exceed $10,000--plus much more
• China– Maintain treaty benefits even once a
resident
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Lesson 4
FAMILY ISSUES
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Family Issues
• Few nonresident students and scholars may claim their family members as dependents.
• If they can (Canada, India, Japan, Korea, Mexico), the dependent must have a taxpayer identification number (TIN):– Social Security Number, SSN– Individual Taxpayer Identification
Number, ITIN
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Filing Status and Marital Status
• Unmarried = Single• Married, use one of the
married statuses even if spouse not in the U.S.
• Only nonresidents from Canada, India, Japan, Korea, and Mexico can claim an exemption for spouse—read the rules.
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Filing Status and Dependents
• Most nonresidents cannot claim their dependents—even if the dependent is a U.S. citizen.
• Only nonresidents from Canada, India, Japan, Korea, and Mexico can claim a deduction for dependents—read the rules.
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Spouse and Dependent Reporting Obligations
• Even if no income, all F-2s and J-2s are required to file a Form 8843 yearly.
• All income must be reported, even if earned in violation of immigration laws
• J-2s are not exempt from FICA taxes
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Lesson 5
TAXATION OF NONRESIDENTS
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Taxation of Nonresidents
– Source of Income
– Type of Income
– “Effectively Connected” versus not effectively connected
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Source of Income
• A nonresident’s Foreign Source Income not taxed in U.S.
• U.S. source income that is not taxed:– Interest Income (interest on deposits
held in the “banking business”)– Qualified scholarships and
fellowships
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Qualified Scholarships/Fellowships
• Candidate for a degree at an accredited institution
• Qualified Expenses– Tuition and Mandatory Fees– Fees, books, supplies, & equip
required of all
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“Effectively Connected?”
• Effectively Connected Income– Students & Scholars are
considered engaged in a U.S. trade/business—thus income “EC”
– Effectively Connected Income Taxed at Graduated Rates•Personal Services (on campus
employment)•Business Profits/Losses
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• Not Effectively Connected Income– 30% (or reduced treaty rate, if
applicable)• Dividends • Interest (from sources other than bank
deposits)• Gambling Income• Sale of Capital Assets• Social Security Benefits• Real Property Income
Other Income
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Adjustments and Itemized Deductions for Nonresidents
• Deduction for Student Loan Interest– Loan must have been for educational
expenses only and interest paid in tax year
• Itemized Deductions– State and Local Taxes– Charitable Contributions—U.S. charities
only– Casualty or Theft Loss, Job Expenses,
and Educational Costs, Tax Prep Fee
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Lesson 6
FORM 8843
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8843
• Name & TIN—must match exactly
• US address only if not filing with 1040NR or 1040NR EZ
• Part I– 1a & 1b: Visa = Status, date
status acquired and visa number (if any)
– 4a & 4b: yes, they must count the days
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• Part III, Students– 9 the official address and phone
of institution– 10 the name, address, and phone
of the international director or academic advisor
• Signature--only if not filed with 1040NR or 1040NR EZ
Form 8843 continued
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Lesson 7
FINISHING THE RETURN
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Finishing the Return• 1040NR and 1040NR EZ require a
taxpayer identification number for filer and any claimed dependents
• Mail 8843 and return together• Every form should have taxpayer’s
name and TIN• Attach W-2s and 1042-Ss to front
left margin • Remind NRA to Keep copies of
everything
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The 1040NR EZ Return
• Line 3: Wages, salaries, tips, etc– to list on wage line of tax return Box 1 of Form
W-2– Add Code 18 income in box 2 of Form 1042-S– Add Code 19 income in box 2 of Form 1042-S– Minus Treaty benefits– Equals Amount
• Line 4: Taxable refunds from state taxes– 1099G (not students from India)
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• Line 5: Scholarship/Fellowships (Room & Board)– Report all that is not exempt via treaty– U.S. source only
• Line 6: Treaty exemption– total exempt salary & scholarship or maximum
allowed by treaty--whichever is less– REMEMBER--do not include this amount in lines
3 or 5• Line 7:
– Line 3 + 4 + 5
Form 1040NR-EZ
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• Line 8: Student loan interest deduction– All these rules must be met:
•Paid during tax year•Must have been required to be paid•Filing status must be single•Loan for educational expenses only•Loan recipient must be at least a
half-time student.
Form 1040NR-EZ
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• Line 9: Scholarship excluded– 1042-S Income and exemption codes
• Income code 15 scholarship– Exemption 2 (tax code) or no exemption
• Line 10: subtract 8 + 9 from 7• line 11: state taxes withheld
– India: Single, $4,750/Married, $4,750• line 12: subtract 11 from 10• line 13: personal exemption
$3,050
Form 1040NR-EZ
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• Line 14: taxable income: subtract 13 from 12
• Line 15: find tax in tax tables • Line 18: Federal income tax withheld
– Form W-2s, box 2– Form 1042-Ss, column g
• Line 19: rare for international students/ scholars
• Line 20: F & J holders are not required to file 1040-C “sailing permits”
Form 1040NR-EZ
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• Taxpayer must sign form• Direct deposit• Installment agreement possible, but
penalties and interest will be charged• VITA Volunteers do NOT sign the form
– Print VITA and Site #
• Page 2--refer to 8843
Form 1040NR-EZ
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When to File 1040 NR
• To claim dependents– Canada, India, Japan, Korea,
Mexico
• Additional deductions– Charitable contributions, etc.
• Not effectively connected income– Dividends
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Lesson 8
SOCIAL SECURITY TAX
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Social Security Tax
• Foreign students and scholars are exempt from FICA (social security and Medicare taxes) while they are nonresidents for tax purposes—this includes students on OPT
• Once they become resident for tax purposes, they are subject to FICA taxes.– Exception for all full-time students
working on campus
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• Dependents in F2 or J2 status are never exempt from FICA
• When withheld in error:– Ask the employer to refund– If not refunded, use IRS Form 843
to request a refund, per the example
Social Security Tax
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Lesson 9
STATE INCOME TAX ISSUES
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State Income Tax Issues
• Some states do not honor income tax treaties
• Other states base their state returns on the federal adjusted gross income
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For Additional Questions
• Refer to the publications that are mentioned in your training material. The publications are available at www.irs.gov
• Call the Philadelphia Service Center at 215-516-2000. It is easier to get through early in the morning or late in the evening.