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U.S. Income Taxation of Foreign Students, Teachers and Researchers

U.S. Income Taxation of Foreign Students, Teachers and Researchers. Arthur R. Kerr II Vacovec Mayotte & Singer LLP 617-964-0500 akerr@vacovec.com. US taxation of individuals is based on the calendar year . January 1 st – December 31st. Resident or Nonresident?

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U.S. Income Taxation of Foreign Students, Teachers and Researchers

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  1. U.S. Income Taxationof Foreign Students,Teachers and Researchers Arthur R. Kerr II Vacovec Mayotte & Singer LLP 617-964-0500 akerr@vacovec.com

  2. US taxation of individuals is based on the calendar year. January 1st – December 31st

  3. Resident or Nonresident? Residence for tax purposes not immigration. Generally based on immigration status and days of presence in the United states

  4. U.S. Tax Residence Nonresident Alien Less than 183 days in US during calendar year Exempt Status (F and J Visas) Do not have to count days of US presence. Resident Alien Lawful Permanent Resident (Green Card Holder) Substantially Present in the U.S. More than 183 days Substantial Presence Test - 3 year look-back Dual Status Taxpayers Part-year resident alien and part-year nonresident alien

  5. Nonresident Alien • Taxable on U.S. source income only. • Filing status Single or Married Separate • U.S. source bank interest and capital gains are tax exempt. • Wages, non-qualified fellowships/scholarship and business income taxed at graduated rates. • Passive income (dividends, rents, royalties etc) taxable at flat rates. • Tax treaties may exempt certain income and/or reduce the rate of tax.

  6. Resident Alien • Subject to U.S. income tax in the same manner as U.S. citizens. • Required to report worldwide income. • Filing status can be Single, Married Filing Joint, Married Filing Separate, Head of Household. • Strict requirements for reporting offshore income, assets and certain activities. • Nonresident alien can elect to be treated as resident alien.

  7. Exceptions to U.S. Residency Closer Connection Exception • Substantial presence but less than 183 days in current year • Closer Connection Extension (Students) Treaty Tie-Breaker • Resident in both countries • Fact balancing test: domicile, principal residence, closer contact, citizenship Exempt Individuals • Exempt from counting days not exempt from tax • Teachers and Researcher Scholars • Students • Professional Athletes and Medical Visitors

  8. Exempt Individuals Students • F, J, M or Q visas • Exempt for 5 Calendar Years • Closer Connection Extension No intent to stay beyond graduation/practical training Teachers and Researchers • J or Q Visas • Exempt for 2 out of the 6 preceding years • No de minimus presence

  9. Dual Status • Transition between Nonresident Alien and Resident Alien status • Year of arrival or departure • Residency start date • Termination date • Change of Visa Status • J1/F1 to H1B • Expiration of Exempt Status • Acquisition of Lawful Permanent Residence (Greencard)

  10. U.S. Taxable Income Wages • US Source • Foreign Employer exception (students) Fellowships and Scholarships • Qualified vs. Nonqualified Other Income • Interest, dividends, rents, royalties, etc.

  11. US Taxable Income Qualified Scholarship • Tax exempt for qualified tuition and expenses • Candidate for degree at educational institution. • Tuition, fees, books and equipment for courses. Nonqualified Fellowships/Scholarships • Taxable • Room and Board (maintenance) • Travel • Cash

  12. Treaty Benefits • Generally for Nonresident Aliens only • Exception for Resident Alien Teachers and Students • Relevant Articles • Residency • Scholarships/Fellowships • Compensation for Services

  13. U.S. Tax Forms Nonresident Aliens • Form 1040NR or 1040NR-EZ, Income Tax return • Form 8843, Statement for Exempt Individuals • Form 8833, Treaty Based Return Position Disclosure Resident Aliens • Form 1040, Income Tax Return • Form 8833, Treaty Based Return Position Disclosure • Offshore Asset/Income Disclosure • FBAR • Reporting Forms: 8938, 5471, 8865, 3520 Dual Status • Form 1040 and 1040NR • Some or all of the other above-referenced forms

  14. Offshore Disclosure Forms • FBAR(Form TD F 90-22.1) - Foreign Bank Account Report • Form 8938 – Foreign Financial Assets • Form 3520 • Gifts and inheritances over $100,000 • Foreign Trust • Form 5471 – Foreign Corporation

  15. Other Tax Considerations State income taxes • State residency rules may differ from federal • States generally follow treaties, but not all (California). • May or may not allow foreign tax credits • Multistate taxation 50 independent jurisdictions Local city, county taxes

  16. Other Tax Considerations U.S. Estate Taxes U.S. born children • Tax filing obligation even if not in the U.S. U.S. citizen spouse • Tax filing obligation even if not in the U.S.

  17. Common Tax Filing Mistakes • Failing to file a tax return • Filing the wrong tax return • Filing using the wrong marital status • Failing to include worldwide income • Incorrectly claiming treaty benefits • Failing to file proper foreign asset disclosure forms

  18. Resources IRS Website • Publication 519, U.S. Tax Guide for Aliens • All tax treaties • Forms and Instructions

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