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Tax Compliance for International Students & Scholars Gary Carter  University of Minnesota
Who Is An Alien? <ul><li>An “alien” is anyone who is not a citizen of the U.S., either by birth or naturalization </li></u...
Who Is a Nonresident Alien? Exempt Individuals <ul><li>An “exempt individual” does not count days present in the U.S. towa...
Who Is a Resident Alien? <ul><li>A student (F or J visa) present in the U.S. longer than 5 calendar yrs who passes the sub...
Resident vs Nonresident Examples  <ul><li>1) Sam, an F-1 (student) visa-holder arrived in the U.S. on  June 1, 2000. Is he...
Resident vs Nonresident Examples <ul><li>3) Juanita, a J-1 (teacher) visa-holder arrived in the U.S. on December 30, 2002....
Dual-Status Aliens <ul><li>Part yr nonresident & part yr resident </li></ul><ul><li>Must follow special filing requirement...
The Nonresident Alien Return <ul><li>Either Form 1040NR or Form 1040NR-EZ </li></ul><ul><ul><li>Must be filed by NR alien ...
What Is Needed From  The Taxpayer <ul><li>Make sure taxpayer has taxpayer identification number (ITIN or Social Security n...
The Return Preparation Process <ul><li>Determine residency status </li></ul><ul><li>Check treaty provisions in IRS Pub. 90...
Form 1040NR or  Form 1040NR-EZ? <ul><li>Form 1040NR always works </li></ul><ul><li>Form 1040NR-EZ can be used when  </li><...
How Nonresident Aliens  Are Generally Taxed <ul><li>Generally only U.S. source income is taxed </li></ul><ul><li>Foreign s...
Effectively Connected vs Not Effectively Connected Income <ul><li>Effectively connected with a U.S. trade or business </li...
Filing Status for  Nonresident Aliens <ul><li>No joint returns for nonresidents </li></ul><ul><ul><li>If married to a citi...
Personal & Dependency Exemptions <ul><li>Exemption amount  for 2004 = $3,100 </li></ul><ul><li>Generally only  one  allowe...
Personal & Dependency Exemptions <ul><li>Japanese & South Korean residents allowed exemptions for spouse &/or children </l...
Personal & Dependency Exemptions: Examples <ul><li>5) Boris is a J-1 nonresident in the U.S. from Russia. His wife and 2 m...
Personal & Dependency Exemptions: Examples <ul><li>7) Sham is a nonresident in the U.S. from India on a J-1 student visa. ...
Wages & Self-employment Income <ul><li>Generally taxable if earned in the U.S. </li></ul><ul><ul><li>W-2, box 1 amount is ...
Tax Treaty Provisions in General: Pub. 901 <ul><li>Treaties override U.S. tax law to exempt income or impose lower rates  ...
Wages & SE Income  Excluded by Treaty <ul><li>See Pub. 901, Table 2, page 34 </li></ul><ul><ul><li>Independent personal se...
Wages & Self-employment Income: Examples <ul><li>8) Reggie is an F-1 nonresident in the U.S. from Canada. In 2004 he earne...
Scholarship & Fellowship Grants <ul><li>Generally taxable if from U.S. payor </li></ul><ul><li>Shown on taxpayer’s Form 10...
Scholarship & Fellowship Grants Excluded by Treaty <ul><li>See Pub. 901, Table 2, page 34 </li></ul><ul><ul><li>Must be fr...
Scholarship & Fellowship Grants: Examples <ul><li>10) Francine is a nonresident French student who came to the U.S. to stu...
Interest, Dividends & Capital Gain Income <ul><li>Generally taxable if from a U.S. payor </li></ul><ul><li>Bank interest i...
More Examples <ul><li>12) Frank is a student in the U.S. since 2000 on an F-1 visa from Finland. In 2004 he received a $2,...
More Examples <ul><li>13) Beth is a nonresident from Belgium in the U.S. on an F-1 visa to study for her master’s degree. ...
More Examples <ul><li>14) Julie is an F-1student from France, arriving in 2004, who received a $10,000 fellowship from the...
More Examples <ul><li>16) Mary is on a J-1 visa from the United Kingdom to teach at the U of M, arriving in 2003. She plan...
Deductions Allowed Against Effectively Connected Income <ul><li>Limited itemized deductions </li></ul><ul><ul><li>See Sche...
Deductions Allowed Against Effectively Connected Income <ul><li>The standard deduction </li></ul><ul><ul><li>Generally  no...
State Issues <ul><li>Income Tax </li></ul><ul><ul><li>Use Form M-1 (no special form for NR aliens)‏ </li></ul></ul><ul><ul...
Social Security Withholding <ul><li>Nonresident aliens holding F, J, M & Q visas are exempt from social security tax </li>...
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Us Tax Compliance For International Students And Scholars

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Us Tax Compliance For International Students And Scholars

  1. 1. Tax Compliance for International Students & Scholars Gary Carter University of Minnesota
  2. 2. Who Is An Alien? <ul><li>An “alien” is anyone who is not a citizen of the U.S., either by birth or naturalization </li></ul><ul><li>A “resident alien” is taxed the same as U.S. citizens (except some can still get treaty benefits)‏ </li></ul><ul><li>A “nonresident alien” is anyone who </li></ul><ul><ul><li>has not been granted permanent resident status by the INS (the “green card” test), and </li></ul></ul><ul><ul><li>has not passed the “substantial presence” test </li></ul></ul><ul><ul><ul><li>See page 4 of Publication 519 </li></ul></ul></ul><ul><ul><ul><li>This test does not apply to an “exempt individual” </li></ul></ul></ul>
  3. 3. Who Is a Nonresident Alien? Exempt Individuals <ul><li>An “exempt individual” does not count days present in the U.S. toward the substantial presence test </li></ul><ul><li>Exempt individual defined: </li></ul><ul><ul><li>A teacher or trainee on a J-1 or Q-1 non-student visa for the first 2 calendar years in the U.S. </li></ul></ul><ul><ul><li>A student on an F-1, J-1, M-1 or Q-1 visa for the first 5 calendar years in the U.S. </li></ul></ul><ul><ul><li>Family members on F-2, J-2, M-2 or Q-2 visas fall under the same rules </li></ul></ul><ul><li>Before and after the period of exemption the individual is subject to the SPT </li></ul>
  4. 4. Who Is a Resident Alien? <ul><li>A student (F or J visa) present in the U.S. longer than 5 calendar yrs who passes the substantial presence test </li></ul><ul><li>A teacher or researcher (J visa) present in the U.S. longer than 2 calendar yrs who passes the substantial presence test </li></ul><ul><li>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 </li></ul>
  5. 5. Resident vs Nonresident Examples <ul><li>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? </li></ul><ul><ul><li>Nonresident </li></ul></ul><ul><li>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? </li></ul><ul><ul><li>Nonresident </li></ul></ul>
  6. 6. Resident vs Nonresident Examples <ul><li>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? </li></ul><ul><ul><li>Resident </li></ul></ul><ul><li>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? </li></ul><ul><ul><li>Resident </li></ul></ul>
  7. 7. Dual-Status Aliens <ul><li>Part yr nonresident & part yr resident </li></ul><ul><li>Must follow special filing requirements </li></ul><ul><li>Most commonly occurs when the taxpayer </li></ul><ul><ul><li>Enters the U.S. and passes substantial presence test in the year of arrival. </li></ul></ul><ul><ul><li>Is an exempt individual and receives permanent resident status during the year. </li></ul></ul><ul><ul><li>Leaves the U.S. after passing the substantial presence test for the year of departure. </li></ul></ul><ul><li>These taxpayers should get professional help </li></ul>
  8. 8. The Nonresident Alien Return <ul><li>Either Form 1040NR or Form 1040NR-EZ </li></ul><ul><ul><li>Must be filed by NR alien on F, J, M & Q visa who has any income subject to tax </li></ul></ul><ul><ul><li>Due April 15 if taxpayer had taxable wages </li></ul></ul><ul><ul><li>Due June 15 if no taxable wages </li></ul></ul><ul><li>All “exempt individuals” must file Form 8843 even if they have no income </li></ul><ul><li>Sent to special address: Internal Revenue Service Center, Philadelphia, PA 19255 </li></ul>
  9. 9. What Is Needed From The Taxpayer <ul><li>Make sure taxpayer has taxpayer identification number (ITIN or Social Security number)‏ </li></ul><ul><li>Have taxpayer complete Form 8843 </li></ul><ul><ul><li>Helps to determine residency status </li></ul></ul><ul><li>Ask for taxpayer’s income statements </li></ul><ul><ul><li>Forms W-2 for wages </li></ul></ul><ul><ul><li>Forms 1099 for interest & dividends </li></ul></ul><ul><ul><li>Form 1042-S for scholarships & treaty exempt income </li></ul></ul><ul><li>If no ITIN taxpayer must attach Form W-7 to return and apply with IRS or Acceptance Agent </li></ul>
  10. 10. The Return Preparation Process <ul><li>Determine residency status </li></ul><ul><li>Check treaty provisions in IRS Pub. 901 </li></ul><ul><li>Prepare Form 1040NR or Form 1040NR-EZ </li></ul><ul><li>Prepare MN Form M-1 & Form M-1PR </li></ul><ul><li>Check social security withholding </li></ul><ul><ul><li>Provide Form 843 if relevant </li></ul></ul><ul><li>Have return reviewed </li></ul>
  11. 11. Form 1040NR or Form 1040NR-EZ? <ul><li>Form 1040NR always works </li></ul><ul><li>Form 1040NR-EZ can be used when </li></ul><ul><ul><li>Taxpayer claims only one exemption </li></ul></ul><ul><ul><li>Taxpayer has no investment income other than bank interest (not taxable)‏ </li></ul></ul><ul><ul><li>Taxable income is < $50,000 </li></ul></ul><ul><ul><li>Taxpayer does not have IRA or moving expense deductions </li></ul></ul><ul><ul><li>Only itemized deduction is state income tax </li></ul></ul>
  12. 12. How Nonresident Aliens Are Generally Taxed <ul><li>Generally only U.S. source income is taxed </li></ul><ul><li>Foreign source income is not taxed unless connected with a U.S. trade or business </li></ul><ul><li>Treaty provisions exclude some income </li></ul><ul><li>Deductions, exemptions & credits are limited </li></ul><ul><li>No standard deduction except for students & business apprentices from India </li></ul><ul><li>Married taxpayers cannot file joint returns </li></ul>
  13. 13. Effectively Connected vs Not Effectively Connected Income <ul><li>Effectively connected with a U.S. trade or business </li></ul><ul><ul><li>Includes wages and U.S. sourced scholarships </li></ul></ul><ul><ul><li>Reported on page 1 of Forms 1040NR or NR-EZ </li></ul></ul><ul><ul><li>Taxed at graduated rates after deductions </li></ul></ul><ul><li>Not effectively connected income </li></ul><ul><ul><li>Investment income (interest, div., cap. gain)‏ </li></ul></ul><ul><ul><li>Reported on page 4 of Form 1040NR </li></ul></ul><ul><ul><li>Not shown on page 1 </li></ul></ul><ul><ul><li>Taxed at flat 30% or lower treaty rate with no deductions allowed - See Pub. 901, Table 1 </li></ul></ul>
  14. 14. Filing Status for Nonresident Aliens <ul><li>No joint returns for nonresidents </li></ul><ul><ul><li>If married to a citizen or resident, a nonresident can elect to file a joint Form 1040 and be treated as a resident </li></ul></ul><ul><ul><li>Other married nonresidents must file as MFS </li></ul></ul><ul><li>Head of household status is unavailable </li></ul><ul><li>Qualifying widow(er) status is available for Canadians, Mexicans, Japanese & Koreans </li></ul>
  15. 15. Personal & Dependency Exemptions <ul><li>Exemption amount for 2004 = $3,100 </li></ul><ul><li>Generally only one allowed for nonresidents </li></ul><ul><li>Mexicans & Canadians use the same rules as U.S. residents </li></ul><ul><ul><li>Allowed for spouse with no gross income </li></ul></ul><ul><ul><li>Allowed for dependent children </li></ul></ul><ul><ul><li>Spouse & children need not live with taxpayer </li></ul></ul>
  16. 16. Personal & Dependency Exemptions <ul><li>Japanese & South Korean residents allowed exemptions for spouse &/or children </li></ul><ul><ul><li>Those claimed must live with taxpayer in the U.S. at some time during the year </li></ul></ul><ul><ul><li>Exemption amount is prorated between effectively connected U.S. gross income and gross worldwide income - See Pub 519, p. 22 </li></ul></ul><ul><li>Indian students can claim an exemption for a spouse with no gross income, & children who are citizens or residents </li></ul><ul><li>An ITIN must be shown for all exemptions </li></ul>
  17. 17. Personal & Dependency Exemptions: Examples <ul><li>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? </li></ul><ul><ul><li>1 for himself </li></ul></ul><ul><li>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? </li></ul><ul><ul><li>4 for himself, wife and children (all must have ITINs)‏ </li></ul></ul>
  18. 18. Personal & Dependency Exemptions: Examples <ul><li>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? </li></ul><ul><ul><li>2 for himself and his wife (both must have ITINs)‏ </li></ul></ul>
  19. 19. Wages & Self-employment Income <ul><li>Generally taxable if earned in the U.S. </li></ul><ul><ul><li>W-2, box 1 amount is reported on Form 1040NR-EZ line 3 or Form 1040NR line 8 </li></ul></ul><ul><ul><li>Self-employment income is reported on Form 1040NR line 21 or 13 (attach Schedule C-EZ)‏ </li></ul></ul><ul><li>Special exclusions for U.S. income received from foreign employers </li></ul>
  20. 20. Tax Treaty Provisions in General: Pub. 901 <ul><li>Treaties override U.S. tax law to exempt income or impose lower rates </li></ul><ul><li>Pub. 901 provides summaries of provisions </li></ul><ul><ul><li>Table 1 (page 31): rates on NECI (investments)‏ </li></ul></ul><ul><ul><li>Table 2 (page 34): exemptions for ECI </li></ul></ul><ul><li>More details are provided for each country </li></ul><ul><ul><li>Beginning on page 14 for teachers & researchers </li></ul></ul><ul><ul><li>Beginning on page 17 for students </li></ul></ul>
  21. 21. Wages & SE Income Excluded by Treaty <ul><li>See Pub. 901, Table 2, page 34 </li></ul><ul><ul><li>Independent personal services = self-employment income </li></ul></ul><ul><ul><li>Dependent personal services = wages </li></ul></ul><ul><ul><li>Compensation during training = wages </li></ul></ul><ul><ul><li>Note payor requirement in treaty provision </li></ul></ul><ul><ul><li>Generally shown on taxpayer’s Form 1042-S </li></ul></ul><ul><ul><li>Not included in total compensation </li></ul></ul><ul><ul><li>Reported only at: </li></ul></ul><ul><ul><ul><li>Form 1040NR, line 22 & page 5, Item M </li></ul></ul></ul><ul><ul><ul><li>Form 1040NR-EZ, line 6 & page 2, Item J </li></ul></ul></ul>
  22. 22. Wages & Self-employment Income: Examples <ul><li>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? </li></ul><ul><li>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? </li></ul>
  23. 23. Scholarship & Fellowship Grants <ul><li>Generally taxable if from U.S. payor </li></ul><ul><li>Shown on taxpayer’s Form 1042-S </li></ul><ul><li>Reported on Form 1040NR-EZ, line 5 </li></ul><ul><li>Reported on Form 1040NR, line 12 </li></ul><ul><li>Code exclusion for “qualified scholarship” </li></ul><ul><ul><li>Student must be a candidate for a degree </li></ul></ul><ul><ul><li>Payment must be for tuition, books or supplies </li></ul></ul><ul><ul><li>Exclusion reported on Form 1040NR-EZ, line 9 </li></ul></ul><ul><ul><li>Exclusion reported on Form 1040NR, line31 </li></ul></ul><ul><ul><li>Statement must be attached to return </li></ul></ul>
  24. 24. Scholarship & Fellowship Grants Excluded by Treaty <ul><li>See Pub. 901, Table 2, page 34 </li></ul><ul><ul><li>Must be from U.S. payor </li></ul></ul><ul><ul><li>Must not represent payment for services </li></ul></ul><ul><ul><li>Generally shown on Form 1042-S </li></ul></ul><ul><ul><li>Do not report in total scholarship income </li></ul></ul><ul><ul><li>Reported only at: </li></ul></ul><ul><ul><ul><li>Form 1040NR, line 22 & page 5, Item M </li></ul></ul></ul><ul><ul><ul><li>Form 1040NR-EZ, line 6 & page 2, Item J </li></ul></ul></ul>
  25. 25. Scholarship & Fellowship Grants: Examples <ul><li>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? </li></ul><ul><li>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? </li></ul>
  26. 26. Interest, Dividends & Capital Gain Income <ul><li>Generally taxable if from a U.S. payor </li></ul><ul><li>Bank interest is excluded (show on page 5 of Form 1040NR, item L) </li></ul><ul><li>Taxable amounts are reported on page 4 of Form 1040NR, not line 9, 10 or 14 of page 1 </li></ul><ul><li>Tax is generally 30% of gross unless a treaty provides a lower rate </li></ul><ul><li>See Pub. 901, Table 1, page 31 for lower treaty rates </li></ul>
  27. 27. More Examples <ul><li>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? </li></ul>
  28. 28. More Examples <ul><li>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? </li></ul>
  29. 29. More Examples <ul><li>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? </li></ul><ul><li>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? </li></ul>
  30. 30. More Examples <ul><li>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? </li></ul><ul><li>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? </li></ul>
  31. 31. Deductions Allowed Against Effectively Connected Income <ul><li>Limited itemized deductions </li></ul><ul><ul><li>See Schedule A, page 3 of Form 1040NR </li></ul></ul><ul><ul><li>Only state income tax for Form 1040NR-EZ </li></ul></ul><ul><li>IRA contribution - 1040NR line 24, page 1 </li></ul><ul><li>Moving expenses -1040NR line 27, page 1 </li></ul><ul><li>Student loan interest </li></ul><ul><ul><li>For school costs incurred at the time of the loan reduced by qualified scholarship </li></ul></ul><ul><ul><li>Limit for 2004 is $2,500 </li></ul></ul><ul><ul><li>Not available to married nonresidents </li></ul></ul>
  32. 32. Deductions Allowed Against Effectively Connected Income <ul><li>The standard deduction </li></ul><ul><ul><li>Generally not available to nonresident aliens </li></ul></ul><ul><ul><li>Exception: Indian students & apprentices only </li></ul></ul><ul><ul><ul><li>Claimed in lieu of any itemized deductions </li></ul></ul></ul><ul><ul><ul><li>Amount = $4,850 for Single; $4,850 for MFS </li></ul></ul></ul><ul><ul><ul><li>Form 1040NR </li></ul></ul></ul><ul><ul><ul><ul><li>Shown on line 3 of Schedule A - write to the left “Standard deduction allowed under U.S./India tax treaty” </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Also shown on line 35 instead of itemized deductions </li></ul></ul></ul></ul><ul><ul><ul><li>Form 1040NR-EZ: Amount is shown on line 11 </li></ul></ul></ul>
  33. 33. State Issues <ul><li>Income Tax </li></ul><ul><ul><li>Use Form M-1 (no special form for NR aliens)‏ </li></ul></ul><ul><ul><li>Start with federal taxable income on line 1 </li></ul></ul><ul><ul><li>On line 2 must add state tax deducted on Form 1040NR-EZ, line 11 (or Form 1040NR, Sched. A)‏ </li></ul></ul><ul><li>Property Tax Refund </li></ul><ul><ul><li>Form M-1PR can be filed by MN resident </li></ul></ul><ul><ul><li>Add nontaxable income on line 5 </li></ul></ul><ul><ul><li>Use CRP from landlord for line 9 </li></ul></ul>
  34. 34. Social Security Withholding <ul><li>Nonresident aliens holding F, J, M & Q visas are exempt from social security tax </li></ul><ul><ul><li>Exemption applies only to -1 visa holders </li></ul></ul><ul><ul><li>Family members on -2 visas are not exempt </li></ul></ul><ul><li>Separate exemption for regular students </li></ul><ul><ul><li>Applies to residents as well as nonresidents </li></ul></ul><ul><ul><li>Family members on -2 visas might qualify </li></ul></ul><ul><li>Form 843 is filed to claim refund </li></ul><ul><ul><li>Tax is sometimes withheld by mistake </li></ul></ul><ul><ul><li>See Pub. 519, page 43 for refund procedures </li></ul></ul>

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