Taxes for Non-U.S. Citizens

1. Taxes for Non-U.S. Citizens Presented by: Edward Shore, Tax Specialist University Accounting Services Cal Poly Pomona March 16, 2007

2. DISCLAIMER I am allowed to provide only general advice based on publications from the IRS and Franchise Tax Board.  The information presented today is general in nature and accurate as of the date of this presentation.

3. Where I Am Located

4. Introduction • Federal: • What is your tax residency? • What is the tax structure? • What are the tax filing requirements? • State: • How is State different from Federal? • What are the tax filing requirements?

5. Tax Compliance: Two Tax Agencies 1. Federal Income Tax: Internal Revenue Service (IRS) 2. California Income Tax: Franchise Tax Board (FTB)

6. Federal Income Tax:Internal Revenue Service (IRS)

7. Federal Income Tax: Pay as you go: tax liability is paid every time income is made Example: Tax withholding from your paycheck every time you get paid. We use tax returns (i.e. Form 1040) to ultimately answer this question: What is the true tax liability?

8. How is tax residency determined?

9. Residence Tests (Federal) • Green Card Test • Legal Permanent Residence Card or • USCIS I-551 Stamp in the Passport • Substantial Presence Test (SPT) • 31 Day Test • 183 Day Test

10. SPT – 183 Day Test • Add: All days present in the U.S. this year plus All days present in the U.S. last year, multiplied by 1/3, plus All days present in the U.S. two years ago, multiplied by 1/6 • If the sum is 183 days or greater, you are considered a resident alien for the entire year. • If the sum is 182 days or less, you are considered a nonresident alien.

11. Count “Zero” days when • You are a student with F, J, Q, or M immigration status and had been in the United States for no more than for five calendar years (lifetime limit) • You are a teacher or researcher with J or Q immigration status and had been in the United States for no more than two of the current and past six years.

12. Example: F-1 Student • Tran entered the United States as an F-1 Student on 9/9/2000. He, now a graduate student, has remained in the United States since. • Tran has also taken an on campus job. • Since Tran is an F-1 student, he gets up to five calendar to “count zero” towards the SPT. After 2004, he must count all days towards SPT. • Taking the test as of December 31, 2006, we have: Tran is a resident alien for 2006. His residency began January 1, 2005.

13. NONRESIDENT ALIEN TAX SYSTEM Nonresident Aliens U.S. RESIDENT TAX SYSTEM U.S. Citizens Legal Permanent Residents Resident Aliens Nonresident vs. U.S Resident • Dual-status Residency has both • Other residency choices, see IRS Publication 519

14. Married Nonresident Aliens can be Treated as Resident Aliens • You must meet the following: • The nonresident alien must be married to a resident alien, permanent resident, or U.S. citizen • Effects: • The IRS will consider the worldwide income for both spouses • The couple must file a joint return • Both spouses must sign a statement making a declaration (refer to IRS Publication 519 for details)

15. What is the tax structure?

16. Federal Tax Systems: Deductions

17. Nonresident Alien Filing Requirements • In general, at least $1 in income • Exceptions: • You have no gross income • Your only income is from wages, totally less than $3,300 in 2006 (Notice 2005-77) • Your only income is from interest from bank, S&L, or credit union, which is interest income. • Deductions are allowed only if they count against effectively connected income

18. What is effectively connected income? Generally ECI consists of the following types of income: • Taxable Scholarships (F, J, M, Q non-immigration status) • Income from performing services (independent contractor and employment) • Gains and losses from sales of U.S. real property

19. Income • Employment • Independent Compensation • Scholarships, Prizes and Awards

20. 1. Employment • What is required to be employed? • Social Security Number • Permission to Work – check your non-immigration status • Form W-4 – Employee’s Withholding Allowance Certificate • Form I-9 – Employment Eligibility Verification

21. NONRESIDENT ALIENS General, must file as Single + 1 Allowance Certain countries allow more than 1 allowance U.S. RESIDENTS File W-4 as the taxpayer sees fit Form W-4 Rules PLEASE NOTE: If you work for Cal Poly Pomona or any other California State University, the EAR (Employment Action Request) serves as a substitute for the W-4.

22. Allowances (W-4): Resident Aliens Only • The more allowances claimed, the less tax withheld, but may result in a tax liability come April 15 • Base the number allowances on: • Whether you are claimed as a dependent on the tax return • If you are married, have children, or other dependents (i.e. parents, siblings) • If you or your spouse have two or more jobs

23. Form W-4

24. 2. Independent Compensation • The payer does not exercise control over you, unlike the employer-employee relationship.

25. 3. Scholarships and Fellowships • Scholarships and fellowships are payments to further a taxpayer’s education and research. • The taxpayer is NOT required to perform services in order to receive the payment. • Scholarships and cash prizes are NOT the same!

26. Qualified Expenses under IRC §117 • Tuition • CSU Fees • Books and supplies required as a condition for enrollment (hard to prove) These scholarships are not taxed or reported. Tuition Fee Waiver pays qualified expenses.

27. Non-qualified expenses • Room and Board • Travel • Miscellaneous • These scholarships are reported and may be subject to withholding.

28. Withholding for Taxable Scholarships • NONRESIDENT ALIENS (Taxable Portion in excess of one personal exemption) • Immigration Status F-1, Q-1, M-1, and J-1 Students: 14% • Everyone Else: 30% • U.S. RESIDENTS • Generally, no withholding is required

29. Ways to Reduce Withholding • Foreign Source Income • Internal Revenue Code (IRC) by legislation passed into law. • Income Tax Treaty

30. Tax Treaties, Part 1 • Agreements that the U.S. has with many countries in the world. • The treaties include articles regarding a wide range of payees, such as students, teachers, employees, prize winners, and royalty holders. • All tax treaty forms require the beneficiary a tax ID to claim its benefits.

31. Tax Treaties, Part 2 • Effects Federal Withholding only • Claim tax treaty benefits during the year: • Form 8233 – Employees, sent to IRS • Form W-8BEN – Independent Contractors and Scholarship Recipients • Form W-9 – some Resident Aliens • Regardless of method, tax treaty benefits are ultimately claimed on the 1040NR. • On the standard 1040NR, complete Item M on page 5.

32. The Golden Rule of Tax Treaties… Every tax treaty is different!

33. End of Year Tax Responsibilities – Federal Tax First we will talk about the University’s responsibilities, then we will talk about your tax responsibilities.

34. University’s Filing Responsibilities

35. Form W-2 –reconciliation of wages for 2006. Furnished to employees no later than January 31, 2007.

36. Form 1042-S: Payment summary to nonresident aliens no later than March 15, 2007. Typical payments include: payments covered by tax treaties, income from independent service, and taxable scholarships

37. Form 1099-MISC (1099): Payment summary for U.S. residents, including resident aliens for almost any type of earnings except wages and salaries. Nonresident aliens should never get this form.

38. Form 1098-T – Tuition Statement: Summary of qualified tuition and scholarships for our students. Most students will receive one. Cal Poly Pomona is required to deliver the form by January 31, 2007. By law, we are not required to issue a statement to nonresident aliens (since most education credits and deductions are not available anyway).

39. Educational Expenses • Credits generally available to U.S. residents (including resident aliens) only: • Hope Credit • Lifetime Learning Credit • Tuition and Fees Deduction • Deductions generally available to both resident and nonresident aliens: • Student Loan Interest Deduction

40. Your Tax Responsibilities

41. What the Taxpayer Files Taxpayer: • Nonresident Aliens: 1040NR or 1040NR-EZ, possibly Form 8843, possibly Form W-7 • U.S. Residents: 1040, 1040A, or 1040-EZ, possibly Form W-7 If you do not have a tax ID, you must file a Form W-7 with your tax return.

42. Form 8843 Who files: • Students under the non-immigration status F, J, M, or Q; and you are counting 0 days towards the substantial test • Teachers under the non-immigration status J or M; and you are counting 0 days towards the substantial presence test • Professional athletes (O or P non-immigration status) • Those who couldn’t leave the country because of medical problems Students: Complete parts I and III only

43. Tax Identification Numbers • For tax reporting purposes, everyone must have a tax ID, which can be: • Individual Taxpayer Identification Number (ITIN) in the form of 9xx-7x-xxxx or 9xx-8x-xxxx (individuals only) • Social Security Number (SSN) in the form xxx-xx-xxxx (individuals only) • Employer Identification Number (EIN), xx-xxxxxxx (companies only)

44. Form W-7 • Give a reason why you are filing this form (most likely reason “f”: “Filing an income tax return”) • Complete all the sections, including Box 6 • You must prove identity and your immigration status. The passport does both. • Obtain and send notarized or certified copies, because we don’t suggest sending originals. • File with your 1040(NR) and 8843 – but file only if you need a tax ID.

45. Filing W-7 Early You can file Form W-7 early when: • You want to claim tax treaty benefits during the year but you do not have a tax ID number • You are a student and earning a scholarship or grant • You receive an honorarium, and you want to claim tax treaty benefits • You open an interest-baring bank account, and you have bank documentation to prove you will be receiving interest

46. Form W-7

47. Deadlines for 2006 Returns

48. Federal Excise Tax Refund (Telephone) • Affects periods March 1, 2003 to July 31, 2006 • Allows federal refund on excise tax charged on your telephone services • You can claim either the standard amount ($30 for 1 exemption) or actual expenses on Form 8913 • File for a refund either: • On the 1040NR • If you are not filing a tax return, use Form 1040NR EZ-T • All applicable forms are found on www.irs.gov.

49. California Income Taxes:Franchise Tax Board (FTB)

50. California Tax Law • In general, California tax law usually conforms to Federal tax law, but NOT for tax treaties • Use income from all sources to determine if you are required to file. You will have to consider your income from sources outside U.S. • Minimum filing requirements (Single, younger than 65, no dependents – for the 2006 year): • California Gross Income: $13,713 • California Adjusted Gross Income: $10,970