Presentation on theme: "But I am not a tax expert! Tax Basics for Assisting International Students and Scholars Mary Upton Theo Wu."— Presentation transcript:
But I am not a tax expert! Tax Basics for Assisting International Students and Scholars Mary Upton Theo Wu
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.
Overheard I’m a foreign person. I don’t have to pay any money to your government. Don’t you know that I’m a foreign student? But my department’s offer letter says this fellowship is not taxable.
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
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
Substantial Presence Test
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.
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
IRS Publication 4011 Pub 4011, IRS Publication 4011, Publication 4011 Determination tree for SPT
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
US person IRS Form 1040 or 1040-EZ OK TurboTax, TaxCut, etc OK W-9
Non-US person Is the payment considered taxable income? If yes, how much tax? Institution has an obligation to withhold AND report
IRS Form W-8Ben
Fellowship/scholarships – Qualified Expenses – Room and Board Salary/wages – Service component Prize/award – Public competition Gifts – No strings attached
What is subject to withholding? NRARA Scholarship/Fellowship Subject to reporting by your org?Yes Taxable?Maybe Subject to withholding?YesNo Salary/Wages Subject to reporting by your org?Yes Taxable?Yes Subject to withholding?Yes Prize/Awards Subject to reporting by your org?Yes$600 or above Taxable?Yes Subject to withholding?YesNo
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
Tax Treaty Benefits, FICA
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
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.
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)
End of the Year
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?
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
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
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
NRARA Fellowship/Scholarship Subject to reporting by IU?Yes Taxable?Maybe Subject to withholding?YesNo Salary/Wages Subject to reporting by IU?Yes Taxable?Yes Subject to withholding?Yes NRA require tax withholding on taxable income
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
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)
In conclusion 1042-S must be postmarked by March NR (individual tax return) due April due March 15 Submitting Form 7004 for the 1042 automatically grants a 6 month extension