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Tax Issues For Foreign Students – F Visa & Opt Status

By cpa | April 15, 2008

Tax issues for foreign students are often very complicate and difficult. What do you do when the first paycheck, scholarship check or loan disbursement check is received and taxes are withheld?
 
First of all, is the student is a “resident alien” or “non-resident alien” for U.S. tax purposes?
 
Resident Alien vs. Nonresident Alien
 
An individual who is not a U.S. citizen is classified as a resident alien if he or she meets
·        lawful permanent resident test which is also known as the green card test,
·        substantial presence test, if such individual is present in the U.S. (i) for at least 31 days during the current year, and (ii) for a total of 183 “adjusted” days during the current and two preceding calendar years. For purposes of applying the 183-day test, a day of presence in the U.S. during the current year counts as a full day; a day of presence in the preceding year counts as 1/3rd of a day; and, a day of presence in the second preceding year counts as 1/6th of a day. Due to special exceptions to the students, the days as students are often exempted. However, there are very complex rules apply here. For example, an individual may not exclude days of presence as an exempt student if the individual has been exempt for two of the prior six calendar years.
·        such alien elects to be treated as a resident. An individual can make an election to be treated as a resident. To qualify for the election the individual must be a resident under the substantial presence. Most foreign students should not attempt to make this election, as it will ordinarily have adverse tax consequences. Students often prefer nonresident alien status on account of the associated exemption from employment taxes. 
 
Resident and nonresident aliens file different types of income tax returns. Resident aliens complete Forms 1040 and are taxed on their worldwide incomes in a manner identical to that of U.S. citizens.
 
On the other hand, nonresident aliens need to file tax returns Forms 1040NR and is only taxed on the US connected income. In general, the US source incomes are subject of 30 percent withholding or the same basis as U.S. citizens.
   
 
Social Security and Medicare Taxes
 
Generally, services performed as a nonresident alien admitted into the U.S. under a F visa are not covered under the U.S. social security program if the services are performed in accordance with the terms of the visa. These individuals are exempt from Social Security and Medicare withholding taxes. Many employers withheld those taxes and it is a very painful process to claim them afterward.
Tax Treaties
 
The U.S. has income tax treaties in effect with many countries. If you are a resident or citizen China, you may qualify for the tax treaty between the U.S. and the People’s Republic of China provides the following:
 
A student, business apprentice or trainee who is or was immediately before visiting [the U.S.], a resident of the [P.R.C.] and who is present in the [U.S.] solely for the purpose of his education, training or obtaining special technical experience shall be exempt from tax in the [U.S.] with respect to:
 
(a) payments received from abroad for the purpose of his maintenance, education, study, research or training;
 
(b) grants or awards from a government, scientific, educational or other tax-exempt organization; and
 
(c) income from personal services performed in [the U.S.] in an amount not in excess of 5,000 United States dollars or its equivalent in Chinese yuan for any taxable year.
 
The benefits provided under this Article shall extend only for such period of time as is reasonably necessary to complete the education or training.
 
Treaty provisions are not limited to simply determining whether income is taxable in one country or not. They may also provide special rules for determining whether the individual is considered a resident alien or not. Also, treaty provisions often reduce the rate at which taxes are withheld upon the payment of certain types of income. For example, the withholding rate reduces from 30% to 15% for China.
 
Students who are considered to be nonresident aliens should provide their employers with Form W-8233 or Form W-8BEN to establish that they are foreign persons. You should also provide your employers with a Form W-4. However, special rules apply to nonresidents filing out Forms W-4. All nonresident aliens should claim single status on Form W-4 even through they are actually married and claim only one allowance on line 5 except residents of Canada, Mexico, Japan or South Korea. Also you need to request your employer withhold an additional $7.60/week because non-resident are not qualify to take standard deduction.

Alien students with U.S. source income may consider consulting with a very qualified tax professional because these tax rules are unfortunately very complex. 

Topics: Individuals |

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