Taxes for International Students
The U.S. income tax system can be especially confusing for international students. If you are a foreign student working in the United States (at your campus bookstore or local coffee shop, for example), you may be required to file an income tax return to report what you have earned from your employment. Depending on your particular situation (your residency status and how much you earn) you may also need to pay income tax to the Internal Revenue Service (IRS).
This article outlines the basic process for foreign students who may need to file a U.S. federal income tax return.
FILING REQUIREMENTS FOR INTERNATIONAL STUDENTS
There is no minimum dollar amount of income that triggers a filing requirement for a nonresident alien (i.e. foreign student or foreign scholar). The usual filing thresholds which apply to U.S. citizens and resident aliens do not apply to nonresident aliens.
However, a nonresident alien whose only U.S. source income is wages is not required to file a U.S. federal income tax return unless those wages exceed the personal exemption amount.
Personal Exemptions: Taxpayers are allowed to claim a personal exemption for themselves, as well as for any dependents they support. A personal exemption is similar to a tax deduction because it lowers your taxable income. For 2011 the personal exemption amount is $3,700. Please refer to IRS Publication 501 (Exemptions, Standard Deduction, and Filing Information) to determine the personal exemption amount.
Filing IS required by nonresident alien students who have any of the following:
- A taxable scholarship or fellowship (described in Chapter 1 of IRS Publication 970, Tax Benefits for Education)
- Income that is partially or totally exempt from tax under the terms of a tax treaty
- Any other income which is taxable under the Internal Revenue Code
Filing IS NOT required by nonresident alien students who have income ONLY from:
- Foreign sources
- Interest Income from: a U.S. bank; a U.S. savings & loan institution; a U.S. credit union; a U.S. insurance company, or; an investment, which generates Portfolio Interest (described in Chapter 3 of IRS Publication 519, U.S. Tax Guide for Aliens)
- A scholarship or fellowship, which is entirely a Tax Free Scholarship or Fellowship (described in Chapter 1 of IRS Publication 970, Tax Benefits for Education)
- Any other income which is nontaxable under the Internal Revenue Code (However, note that income which is not taxable because of an income tax treaty must be reported on a U.S. income tax return, even though no income tax is due on the U.S. income tax return.)
As a foreign student, the taxation of your income is greatly based on your residency status.
Although the immigration laws of the United States refer to aliens as ‘immigrants,’ ‘non-immigrants,’ and ‘undocumented (illegal) aliens,’ the tax laws use the terms RESIDENT and NONRESIDENT ALIENS instead.
In general, Resident Aliens are taxed in the same manner as U.S. citizens on their worldwide income, and Nonresident Aliens are taxed according to special rules contained in certain parts of the Internal Revenue Code. Note that the source of your income is very important — a nonresident alien is subject to federal income tax only on the income which is derived from sources within the United States and/or income that is effectively connected with a U.S. trade or business.
Under the residency rules of the Internal Revenue Code, any alien who is not a Resident Alien is considered a Nonresident Alien.
An alien can become a RESIDENT ALIEN in one of three ways:
- By being admitted to the United States as, or changing status to, a Lawful Permanent Resident under the immigration laws (the Green Card Test)
- By passing the Substantial Presence Test (which is a numerical formula which measures the days you are present in the United States)
- By making what is called the “First-Year Choice” (a numerical formula under which you may pass the Substantial Presence Test one year earlier than under the normal rules). For more information, refer to the discussion of “First-Year Choice” in Chapter 1 of IRS Publication 519.
Under these rules, even an undocumented (illegal) alien under the immigration laws who passes the Substantial Presence Test will be treated for tax purposes as a Resident Alien.
Determining Alien Tax Status
To be considered a ‘resident alien’ of the United States for tax purposes, you must meet either the Green Card Test or the Substantial Presence Test for that calendar year (January 1 to December 31).
Note that you can be both a nonresident alien and a resident alien during the same tax year. This usually occurs in the year you arrive or depart from the United States. In this case, you may elect to be treated as a ‘Dual Status Alien’ for that tax year and a ‘resident alien’ the following tax year if you meet certain tests. (For more information, see IRS Publication 519, Tax Guide for Aliens.)
INDIVIDUAL TAXPAYER IDENTIFICATION NUMBER (ITIN)
Generally aliens may apply for either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) for use on tax related documents. An ITIN is a 9-digit number that is issued to individuals who are required to have a U.S. taxpayer ID number, but do not have (or are not eligible for) a Social Security Number (SSN).
Note that the ITIN is for Federal tax purposes only ‘ it does not entitle you to Social Security benefits or change your immigration status in the United States. If you are a resident or nonresident alien, you should provide your ITIN wherever your SSN is requested on the tax return.
Form W-7 is the Application for IRS Individual Taxpayer Identification Number and it is used to apply for an individual taxpayer identification number (ITIN) from the IRS.
INCOME OF INTERNATIONAL STUDENTS
Aliens should report their income on U.S. income tax returns as follows:
- Resident Aliens report their entire worldwide income on Form 1040, 1040A, or 1040EZ like U.S. Citizens.
- Resident Aliens may not claim exclusions of income based on Tax Treaties (with certain exceptions for foreign students and foreign scholars).
- Nonresident Aliens use Form 1040NR or 1040NR-EZ to report only income that is sourced in the United States, or that is effectively connected with a United States trade or business. (Refer to IRS Publication 519 for definition of “effectively connected income,” and to IRS Publication 515 section “Source of Income” for information about “U.S. Source Income.”)
- Nonresident Aliens who receive interest income from deposits with a U.S. bank, savings & loan institution, credit union, or insurance company, or who receive Portfolio Interest (described in IRS Publication 519) are exempt from taxation on such interest income as long as such interest income is not effectively connected with a U.S. trade or business.
Dual Status Aliens
- Dual Status Aliens report their entire worldwide income for that portion of the year in which they are Resident Aliens, and report only income that is sourced in the United States or that is effectively connected with a U.S. trade or business for that portion of the year in which they are Nonresident Aliens.
- Dual Status Aliens report their interest income from all sources for that portion of the year in which they are Resident Aliens, and do not report interest income from deposits with U.S. banks, savings & loan institutions, credit unions, on amounts held by an insurance companies, and investments which generate portfolio interest for that portion of the year in which they are Nonresident Aliens as long as such interest income is not effectively connected with a U.S. trade or business.
Income for Nonresident Aliens
For U.S. tax purposes the income of a nonresident alien is divided into two categories: FDAP (Fixed, Determinable, Annual, or Periodical) and ECI (Effectively Connected Income).
FDAP ‘ Fixed, Determinable, Annual, or Periodical
- Usually consists primarily of passive investment income ‘ interest, dividends, rents, royalties, etc. ? but, in theory, may consist of any kind of U.S. source income attributable to a foreign person).
- Deductions are not allowed against FDAP income, and it is taxed at a flat 30% rate or lesser rate under a tax treaty.
- The FDAP income of an individual is reported on Page 4 of Form 1040NR.
ECI ‘ Effectively Connected Income
- Income which is Effectively Connected with a U.S. Trade or Business.
- The income must relate to an activity which is considered to be a trade or business under the principles of U.S. tax law (including the personal service income of an individual who performs services in the United States);
- Investment income will be considered to be ECI if the income must be associated with U.S. assets used in, or held for use in, the conduct of that trade or business; or the activities of that trade or business conducted in the United States are a material factor in the realization of the income.
- Deductions are allowed against ECI, and net ECI is taxed at the same graduated rates used by U.S. citizens.
- The ECI of an individual is reported on Page 1 of Form 1040NR.