U.S. Taxation of Foreign Students 2006 Tax Year

1. U.S. Taxation of Foreign Students 2006 Tax Year Presented by Paula N. Singer, Esq. Partner, Vacovec, Mayotte & Singer LLP Chairman, Windstar Technologies, Inc.

2. Your Goals • Determine your tax filing obligations • Submit the correct tax form(s) • Claim only allowable deductions and credits • Claim only allowable treaty benefits • Submit the tax form(s) timely • Pay the proper tax

3. General Information • Basic Concepts • Filing Requirements • Tax Forms • Due Dates • Where to File • Penalties / Ramifications of Not Filing • Identification Numbers

4. Basic Concepts • Tax Return • Form you complete and file • Computes your tax liability • Form depends on your tax residency status • Must be filed with the appropriate tax authority • Tax Authorities • IRS – Internal Revenue Service • Mass D.O.R. – Massachusetts Department of Revenue • Other states

5. Basic Concepts • Tax Year • Calendar year: January 1 – December 31 • Withholding • Taxes withheld from income payments: compensation, taxable scholarships, etc. • Advance payment toward tax liability • Does not excuse tax return filing obligation • Withholding ≠ tax liability

6. Basic Concepts • Federal Tax Residency Status • Resident Alien (RA) • Nonresident Alien (NRA) • Dual-status Taxpayer (typically in year of change to H-1B status) • State Tax Residency Status • Resident • Nonresident

7. Basic Concepts Immigration vs. tax definitions of residency • Immigration • A nonimmigrant is a nonresident • An immigrant (“green card holder”) is a resident • Tax • A nonimmigrant can be either a nonresident (NRA) or a resident (RA) • A green card holder is a resident (RA)

8. Basic Concepts: Residents • Are subject to tax on their worldwide income • Can claim deductions for their dependents: • Who are US citizens, US nationals, or US residents, or residents of Canada or Mexico, and • Who have a US taxpayer identification number • Can claim the standard deduction or itemized deductions if higher • Can claim credits available to US citizens except for the Earned Income Tax Credit (EITC) • May have disclosure form requirements

9. Basic Concepts: Residents • File Form 1040, 1040A, or 1040EZ - Can e-file! • File Mass Form 1 (or Form 1NR) • Should have income reported on: • Form W-2 for taxable wages • Form 1099 for dividends, interest, etc. • Form 1042-S for treaty exempt income • May have disclosure form requirements • Form TD 90.22-1 Foreign Bank and Financial Account Disclosure • Form 3520 to disclose bequests or gifts from abroad

10. No income or income less than filing threshold: File a tax return if: Single and income is at least $8,450 Married-filing-jointly and income is at least $16,900 Income: 1040, 1040A or 1040EZ MA Form 1 or Form 1NR RA Filing Requirements

11. Basic Concepts: Nonresidents • Can only file using single or married-filing–separately status • Can claim only one personal exemption amount ($3,300) with a few exceptions • Cannot claim the standard deduction (except for residents from India who are students or business apprentices) • Only pay US tax on US-source income and income connected to a US trade or business

12. Basic Concepts: Nonresidents • File Form 1040NR or 1040NR-EZ tax return -Cannot e-file! • Mass Form 1-NR (or Form 1) • Should have income reported on: • Form W-2 for taxable wages • Form 1042-S for taxable scholarships, prizes, gambling winnings, treaty exempt income including wages • But may also have income reported on Form 1099-INT or 1099-MISC • File Form 8843 information return if they are “exempt individuals” in F, J, M, or Q status

13. NRA Filing Requirements • Who doesn’t have to file? • Nonresidents whose only income is wages that do not exceed $3,300 don’t have to file a Form 1040NR-EZ or 1040NR • But if you had taxes withheld, you must file to claim a tax refund • But if your wages or scholarship are exempt under a treaty, you must file • But you may still have to file Form 8843 • Mass residents or nonresidents whose income is less than the no tax status amount

14. NRA Filing Requirements • Who must file? • All nonresidents with effectively connected income • Employment wages • Self-employment income • Taxable scholarship and fellowship grants for recipients in F, J, M, or Q status • Even nonresidents whose income is exempt under a tax treaty must file a tax return • Even certain dependents in F, J, M, or Q status with no income must file Form 8843

15. No Income: Form 8843 (F, J, M, or Q status individuals) Form 1040EZ-T Income: Form 1040NR Form 1040NR-EZ Form 8843 attached to tax return Possibly MA Form 1 or MA Form 1NR NRA Filing Requirements • What to file:

16. Tax Forms You May Receive • Form W-2 • Form 1042-S • Form 1099-INT • Form 1099-MISC

17. Tax Forms You May Need to Complete • Federal • Form 8843 • Form 1040NR • Form 1040NR-EZ • Form 1040 • Form W-7 • State • Form 1 • Form 1-NR

18. Obtaining Tax Forms • The best way to obtain tax forms is to download them from the Internet: Federal Forms: http://www.irs.gov/formspubs/index.html MA Forms: http://www.dor.state.ma.us/forms/FormsMenu2.htm • Your international office may also have copies.

19. Due Date • April 15 if you for RAs and NRAs with taxes withheld recorded on Form W-2 • For 2007: April 17 • Otherwise, June 15 for NRAs.

20. Where to File • Nonresident Federal Tax Returns: Internal Revenue Service Center Austin, TX 73301-0215 (But see special tax return submission rules if you or a dependent needs to apply for an individual taxpayer identification number.) • For all other returns: Check filing instructions

21. Penalties / Ramifications of Not Filing • Penalties based on the tax due: • If no tax is due, no monetary penalty is imposed • Possible immigration consequences • File to obtain refund of withheld taxes

22. Work Authorized: Social Security Number To obtain the number, you must contact the nearest Social Security Administration office for an interview F-1 and J-1 Students must have a job or job offer and letter from DSO/RO Taxpayer Identification Numbers

23. Taxpayer Identification Numbers Not Work Authorized: • Individual Taxpayer Identification Number (ITIN) for a tax administration purpose • To obtain an ITIN, submit Form(s) W-7 with required documentation (certified) and original signed tax return to: Internal Revenue Service ITIN Unit PO Box 149342 Austin, TX 78714-9342

24. Residency Status

25. Residency Status • Green Card Test • Substantial Presence Test • Exempt Individual • Time Limits on Exempt Status • F & J students • J “teachers and trainees” (i.e., nonstudents) • Measuring Years

26. Green Card Test • A lawful permanent resident or “green card” holder is a resident for U.S. tax purposes • Tax residency begins on the notice date approving the application • One remains a tax resident even if he or she leaves the U.S. • One remains subject to U.S. tax reporting requirements

27. Substantial Presence Test(2006 Computation) Physical presence in the U.S. for: • 31 days in 2006, and • 183 days during a 3-year period counted as follows: • All days in 2006 • 1/3 of days in 2005 • 1/6 of days in 2004

28. “Exempt Individuals”

29. Exempt Individuals • F or J students • J nonstudents • Exempt from counting days of US presence for substantial presence test (SPT) • Not exempt from tax under this rule • But may be exempt from tax under a tax law or tax treaty

30. Time Limits on Exempt Status • F or J students: • Five (5) calendar years • J nonstudents: • 2 out of 7 calendar years • 4 out of 7 calendar years if ALL income foreign source

31. Time Limits on Exempt Status • Must count prior calendar years in F, J, M, or Q exempt individual status • Can become an RA sooner because of earlier years EXAMPLES

32. Taxation Based on Residency Status

33. Taxation Based on Residency Status • Income • Wages / Salary • Non-employee Compensation • Scholarships / Fellowships • Interest • Dividends • Capital Gains • Exempt Income

34. Income • Residents: • Taxed on worldwide income • Wages • Scholarships • Investment income • Nonresidents: • Taxed only on US source income

35. NRA - Wages / Salary • Source based on where services performed • Principal exceptions • Income received from a foreign payer by a F or J visaholder while nonresident • Income exempt by treaty

36. Non-employee Compensation • From services as an independent contractor (self-employment) • Caution: most nonimmigrants cannot freelance • Usually reported on: • Form 1099-MISC for RA recipients • Form 1042-S (income code 16) for NRA recipients • Sourced based on location of services

37. Scholarships / Fellowships • Sourcing based on location of payer not location of recipient • Nontaxable non-US source includes scholarships / fellowships from: • Foreign governments • International organizations • Even if managed by U.S. agent • US source • Divided into taxable and nontaxable

38. U.S. Source Scholarships: Nontaxable • Tuition • Fees required for enrollment in an educational organization • Fees, books, supplies, and equipment require for enrollment in a particular course at an educational organization • Tuition reductions awarded to graduate teaching and research assistants, unless the reduction represents payment for services

39. U.S. Source Scholarships: Taxable • Fees for room, board, and incidental expenses • Any amount paid for services, even if similar services are required of all candidates for a particular degree • Value of room and board received for work performed • Exception for Resident Assistants • Graduate assistantship stipends • Withholding at 14% or exempt under a tax treaty

40. Interest • Bank interest • Not taxable to NRA unless connected to U.S. trade or business even if reported on Form 1099-INT • Portfolio interest

41. Dividends • U.S. source dividend income is taxed at a flat 30% rate • Except if the rate is reduced by an income tax treaty • Must still be tax resident in treaty country • Mutual funds generally pay dividends, not interest

42. Capital Gains • Generally, an NRA will not be subject to tax on sale of capital assets such as shares of stock • Applicable only if individual is the U.S. less than 183 days during the year of sale • Gains on the sale of real estate and U.S. business assets are subject to tax

43. Other Nontaxable Items • Gifts • Loans

44. Form 8843 Only • Required to file Form 8843 to document exempt status for residency test • Not required to file a Form 1040NR-EZ or 1040NR • No W-2 • No 1042-S • No reportable investment income

45. Tax Withholding

46. Tax Withholding • Payroll Taxes • Federal Income Tax • FICA Tax • Exceptions to FICA Tax • State Income Tax • Sample Form W-2 • Investment Income • Scholarships to NRAs • Tax Withholding Points

47. Payroll Taxes • Withheld by employer • Federal Income Tax • Graduated rates: 10%-35% • Based on Form W-4 submitted to employer • Reported in Box 2 of Form W-2

48. Payroll Taxes – FICA Tax • Social Security Tax • 6.2% of wages up to annual limit • The annual limit in 2006 was: $94,200 • Reported in Box 4 of Form W-2 • Medicare Tax • 1.45% of wages • Reported in Box 6 of Form W-2

49. Exceptions to FICA Tax • Lawfully employed nonresident F-1, J-1, M-1, and Q-1 visaholders • Services performed by an enrolled student for the school he/she regularly attends • Services performed for state or local government, unless an agreement with the federal government is involved • Services provided for a foreign government • Services provided for an international organization • Exceptions do not apply to F-2 or J-2 visaholders

50. Payroll Taxes – State Taxes • Income Tax • Withholding based on Form W-4 or state equivalent • Reported in Box 17 of W-2