Tax Information for Foreign Students
If you are a foreign student in the
United States, your tax liability will be determined by several factors. Firstly, what is your residency status. Secondly, what is the source of your income and should it be taxed. Finally, is there a relevant tax treaty between the
United States and your country of origin. These three factors will determine your federal tax liability.
The first thing you need to determine is whether or not you are a resident for taxation purposes. While legal residency may overlap with residency for tax purposes, they are not necessarily the same. It is important for you to determine whether you are a resident for tax purposes, whether or not you are a legal resident.
There are two major criteria that determine residency: the ?green card? test, and the substantial presence test (SPT).
If you have a ?green card? or acquire one while you are in the
United States, your residency begins the day you enter the country or your green card is valid.
The substantial presence test is a bit more complicated. You will have met the substantial presence test for residency if you have resided in the United States for at least 31 days in the current year and 183 days overall. The rules for SPT are quite complicated because they can extend over three years and there are conditions under which some days may be exempt. Being an exempt individual does not mean that you are exempt from paying federal taxes; rather, it means that you are exempt from counting particular days toward the SPT. In this case, you may have resided in the
United States for a year or more and remain a non-resident for tax purposes.
Some of the most common reasons for you to be a non-resident are the rules governing foreign students. If you hold an F, J, Q, or M visa and have complied with all the rules governing your visa, you will be considered exempt for tax purposes. As long as you are a student, you may keep this status for five years. You should file a 1040NR and Form 8843 with the IRS. If you meet the requirements for SPT, you need to file a 1040 for the non-exempt days of the current tax year. Resident and Non-resident status becomes more complicated if you have not been in the country for the entire tax year and if you have a spouse or dependents.
Taxation for Non-Resident Foreign Students
If you do not meet the criteria for either the ?green card? test or the SPT test, then you will have to file a 1040NR. Usually, you will only be taxed on income earned in the
United States. For students, there are three categories of income that are relevant: personal service income, scholarship income, and investment income. Personal income refers to the income you receive from being a teaching assistant, research assistant, instructor, and/or researcher. This income is taxed at a graduated rate with some exceptions. If you receive a scholarship or fellowship, this is also taxed at a graduated rate; however, certain expenses can be deducted. For instance, you may be able to deduct tuition and expenses for books that are necessary for your course of study. Investment income is taxed at a flat rate of 30% for non-resident students. However, this can be a little tricky. Certain investment income such as interest received on a savings account in the
United States is not considered taxable, while other forms of investment income, such as dividends, are considered taxable income.
Tax Treaty Implications
Finally, your tax liability could be affected by one of the treaties between the
United States and your country of origin. The rules governing federal taxes differ widely depending upon the country of origin of the student. The
United States has over fifty different tax treaties with differing provisions, depending upon the country of origin. Therefore, the tax liability of one student may vary from the tax liability of another student. In 2006, a revision of a tax law stated that up to $9,000 of personal service income could be exempted from
US taxation. In addition, separate treaties provide even greater benefits for non-resident students.
India, for example, has one of the most generous treaties, which provides for all of its students in the
US to receive the same tax benefits as resident students. Other treaties have different levels of benefits for different amounts of time. It is important to find the relevant treaty governing your specific situation.