But I am not a tax expert! Tax Basics for Assisting International Students and Scholars

1. But I am not a tax expert! Tax Basics for Assisting International Students and Scholars Mary Upton Theo Wu

2. Intended beneficiaries • If you’re responsible for providing education to foreign students and scholars, AND • That person receives income from your organization, THEN • We hope this presentation will help you demystify US tax law expectation and give you confidence to know where help can be found.

4. Overheard Don’t you know that I’m a foreign student? I’m a foreign person. I don’t have to pay any money to your government. But my department’s offer letter says this fellowship is not taxable.

5. Wrong Expectations • US Tax Law • Tax treatment of US persons DOES NOT equal tax treatment of non-US persons • Without doing anything, a foreign person’s income must have taxes withheld • AND the IRS holds you accountable to make sure the taxes are withheld and remitted

6. Four terms • US person for tax purposes • US citizen, Legal Permanent Resident, Resident Alien (is a foreign national) • Meets the Substantial Presence Test • Non-US person for tax purposes • Nonresident Alien (is a foreign national) • Does not meet the Substantial Presence Test

7. Substantial Presence Test

8. Substantial Presence Test (SPT) • 31 days during the current year, and • 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting: • All the days you were present in the current year, and • 1/3 of the days you were present in the first year before the current year, and • 1/6 of the days you were present in the second year before the current year.

9. Substantial Presence Test (SPT) • Exempt from counting days: • Does not mean exempt from paying US taxes • F-1 and J-1 students (5 years) • J-1 non-students (2 of last 6) • In current year, count all days the person is available to be present in the US • Resident aliens from day 1 • Retroactive withholding to day 1

10. IRS Publication 4011 • Pub 4011, IRS Publication 4011, Publication 4011 • Determination tree for SPT

11. Review • A foreign person in the US is considered: • Resident alien for tax purposes • Nonresident alien for tax purposes • Determined by the SPT on his physical presence • Publication 4011 is a helpful decision tree

12. US person • IRS Form 1040 or 1040-EZ OK • TurboTax, TaxCut, etc OK • W-9

13. Non-US person • Is the payment considered taxable income? • If yes, how much tax? • Institution has an obligation to withhold AND report

14. IRS Form W-8Ben

15. Defining Income

16. Defining Income • Fellowship/scholarships • Qualified Expenses • Room and Board • Salary/wages • Service component • Prize/award • Public competition • Gifts • No strings attached

17. What is subject to withholding?

18. Withholding Rate

19. Withholding Rate • 30% federal income tax rate • Scholarship/fellowship federal tax rate reduced to 14% • F, J, M, Q visa status • Payroll is at graduated rates but does not include the standard deduction because that’s for US persons • ? % state income tax rate

20. Tax Treaty Benefits, FICA

21. Tax Treaty Benefits • Avoid double taxation • Not granted automatically • Must be a non-US person in the current year • Must address this type of income • Each tax treaty is different • Requires a US based tax identifying number • Reduces the tax rate • Based on tax residence

22. Tax Treaty Benefits • If you are ever concerned about the person’s qualifications to get a tax treaty benefit, you should withhold now and let the person make a claim for the benefit when the person files a tax return at the end of the year.

23. FICA Taxes • NRA FICA exemption (IRC Section 3121(b)(19)) • Non-US person in the current year • F, J, M, or Q visa type • Performed to carry out the purpose specified in subparagraph (F), (J), (M), or (Q) (i.e. F-1 student is studying full-time and not working full-time)

24. End of the Year

25. End of Year I’m still not a US person. I don’t pay taxes to your government. I claimed the tax treaty and didn’t have any taxes taken from my pay. The government must understand this is very hard and I don’t understand English well Last year I did my tax refund and didn’t owe. This year, why do I owe?

26. End of Year • The IRS expects your foreign visitors to complete a tax return if she was present in the US during the year • US person: 1040 or 1040EZ (like any US person) • Non-US person: 1040NR or 1040NR-EZ • At the end of the year, a non-US person may also receive the 1042-S form instead of or in addition to the W-2 • You use these reporting forms to complete your tax filing for the year

27. IRS Form 1042-S • Claim tax treaty benefit on incomes • Reporting of taxable income provided to the individual except salary/wage income (W-2) • May include the tax amount withheld • May include special situations in which taxes are not withheld but the income is taxable

28. In review

29. In review Substantial Presence Test = (1 x Current Year Days) + (1/3 x Last Year Days) + (1/6 x 2 Years Ago Days) • Substantial Presence Test helps determine Resident alien or nonresident alien • IRS Publication 4011

30. In review

31. In review NRA require tax withholding on taxable income

32. In review • 30% federal income tax rate • Scholarship/fellowship federal tax rate reduced to 14% • F, J, M, Q visa status • ? state income tax rate

33. In review • Tax treaties: • Must be a NRA in the current year • Requires a US based tax identifying number • Based on tax residence • NRA FICA exemption • Must be a NRA in the current year • F, J, M, or Q visa type • Performed to carry out the purpose specified in subparagraph (F), (J), (M), or (Q)

34. In conclusion • 1042-S must be postmarked by March 15 • 1040NR (individual tax return) due April 15 • 1042 due March 15 • Submitting Form 7004 for the 1042 automatically grants a 6 month extension

35. Questions?