Lesson 1 DETERMINATION OF RESIDENCY STATUS
Determinationof Residency Status • Do not confuse tax residency with: • immigration residency • residency for tuition purposes • residency requirements for earning a degree etc.
Resident or Nonresident? • Substantial Presence Test • Exempt Individual • Green Card Test • Residency Through Marriage • Dual-Status Alien
Substantial Presence Test • 31 days during the current year, and • 183 days during the three year period that includes the current year and the two years immediately before that counting: • current year times 1, plus • first preceding year times 1/3, plus • second preceding year times 1/6.
Exempt Individuals • F, J, M, & Q student status holders • J & Q teacher or trainee status holders • Not exempt from taxation. Exempt from counting days of presence for a specified period of time.
Exempt students (F & J) • 5 years • Dependents are included if their status is derivative and they are dependent on the main status holder • All must file an 8843
Exempt teacher/trainee • Any two years out of a six year period • Must count years in student or trainee status • Dependents are included if their status is derivative and they are dependent on the main status holder • All must file an 8843
Establishing a closer connection • Can ignore the substantial presence test if: • are present in the U.S. less than 183 days in the current year, • have a tax home in a foreign country for the entire year and closer ties with that country than the U.S., and • file form 8840.
Green Card Test • Date of adjustment to status--not the date pink ‘green card’ issued • No option--if you are a Permanent Resident, you are a resident for tax purposes
Residency Starting Date • Passes Substantial Presence Test (SPT) • First day of the tax year the SPT is passed • Granted permanent residence status--green card test • First day in the U.S. as permanent resident • When both apply: the earlier of the two
Residency through marriage • Nonresident spouse treated as a resident • May file as residents, but required to file a statement, signed by both, and • Required to file jointly, and • Report world-wide income
Dual-status Aliens • Can be very complex • Applies when taxpayer has two residency statuses during the same tax year • Refer to professional preparer
Lesson 2 WHO MUST FILE
Who Must File • In the United States, unlike most of the world, it is the individual’s responsibility to know what taxes must be filed with the government. • Most of the world, the government automatically assesses and collects taxes.
Resident Aliens • File just as United States citizens file • See IRS Publication 17 or any of the numerous VITA sites for U.S. citizens • Extensive number of resources, public and private, for help with tax obligations
Dual Status Aliens • See IRS Publication 519 for a detailed description of this status and examples of how to file. • Too complex for this training, encourage dual status aliens to seek professional help with their tax questions.
How nonresident is different • Generally pay tax only on US-source income • Interest may be tax free • Married nonresidents cannot file jointly • Generally only one personal exemption • Most tax credits do not apply • Standard deduction not allowed (except students from India)
Nonresident Rules • Itemized deductions limited to: • state and local taxes withheld • contributions to charity • casualty/theft losses • miscellaneous business deductions • Investment income (other than interest) is generally taxed at a flat 30%
Nonresident Aliens Filing Requirements • Who • All F, J, M, and Q status holders must file a statement to substantiate non-residence and possibly a tax return • What • Form 8843—mandatory for all nonresidents • Possibly Form 1040NR or 1040NR EZ
When and Where to File • When • Tax returns by 15 April • Form 1040NR or Form 1040NR EZ • Form 8843 only by 15 June • Where • Internal Revenue Service Center • Philadelphia, PA 19255-0219
1040NR-EZ instead of 1040NR • Does not claim dependents • Cannot be claimed as someone’s dependent • Under 65 • Only wages, salaries, tips, taxable refunds of state/local income taxes, & scholarships or fellowships--all other income on 1040NR • Taxable income <$50,000
Additional limitations of Form 1040NR-EZ • Cannot claim any adjustment to income except scholarship & student loan interest • Cannot claim tax credits • No exemption claimed for spouse • If itemizes, can only claim state income tax deductions • The only taxes owed are income taxes
Consequences of Failure to File • If no taxes are owed--no penalty. • Although, Form 8843 always required • However, nonimmigrant alien status requires that the individual not violate any U.S. laws—including tax laws.
Lesson 3 TREATY OVERVIEW
Treaty Overview • IRS Publication 901 your simplest resource for details of treaties • Treaties can exempt income that are classified as scholarship or compensation for teaching or during studies • File IRS Form 8233 with payer to exempt income from withholding
Points to Consider When Determining Treaty Application • Purpose is based on immigration status! (A graduate student teaching classes is a student and not teacher.) • Student/scholar must have been tax resident of treaty country immediately prior to coming to U.S. for purpose on current INS documents. • Dependent and Independent Personal Services rarely allowed for students and scholars—see Canada exception. • Clarification--read the text in Pub 901
IRS Income Codes on 1042S • 15 Scholarship or Fellowship grants • Qualified (unreported and untaxed): tuition, mandatory fees, and maybe books • Nonqualified (reported and taxed, if not exempt by treaty): room and board and uncontrolled payments • 18 Compensation for teaching and research • 19 Compensation during study and training
Unique Treaty Provisions • India • Standard deduction and exemptions for spouse and dependents (always read dependents) • Canada • $10,000 dependent personal services if it does not exceed $10,000--plus much more • China • Maintain treaty benefits even once a resident
Lesson 4 FAMILY ISSUES
Family Issues • Few nonresident students and scholars may claim their family members as dependents. • If they can (Canada, India, Japan, Korea, Mexico), the dependent must have a taxpayer identification number (TIN): • Social Security Number, SSN • Individual Taxpayer Identification Number, ITIN
Filing Status and Marital Status • Unmarried = Single • Married, use one of the married statuses even if spouse not in the U.S. • Only nonresidents from Canada, India, Japan, Korea, and Mexico can claim an exemption for spouse—read the rules.
Filing Status and Dependents • Most nonresidents cannot claim their dependents—even if the dependent is a U.S. citizen. • Only nonresidents from Canada, India, Japan, Korea, and Mexico can claim a deduction for dependents—read the rules.
Spouse and Dependent Reporting Obligations • Even if no income, all F-2s and J-2s are required to file a Form 8843 yearly. • All income must be reported, even if earned in violation of immigration laws • J-2s are not exempt from FICA taxes
Lesson 5 TAXATION OF NONRESIDENTS
Taxation of Nonresidents • Source of Income • Type of Income • “Effectively Connected” versus not effectively connected
Source of Income • A nonresident’s Foreign Source Income not taxed in U.S. • U.S. source income that is not taxed: • Interest Income (interest on deposits held in the “banking business”) • Qualified scholarships and fellowships
Qualified Scholarships/Fellowships • Candidate for a degree at an accredited institution • Qualified Expenses • Tuition and Mandatory Fees • Fees, books, supplies, & equip required of all
“Effectively Connected?” • Effectively Connected Income • Students & Scholars are considered engaged in a U.S. trade/business—thus income “EC” • Effectively Connected Income Taxed at Graduated Rates • Personal Services (on campus employment) • Business Profits/Losses
Other Income • Not Effectively Connected Income • 30% (or reduced treaty rate, if applicable) • Dividends • Interest (from sources other than bank deposits) • Gambling Income • Sale of Capital Assets • Social Security Benefits • Real Property Income
Adjustments and Itemized Deductions for Nonresidents • Deduction for Student Loan Interest • Loan must have been for educational expenses only and interest paid in tax year • Itemized Deductions • State and Local Taxes • Charitable Contributions—U.S. charities only • Casualty or Theft Loss, Job Expenses, and Educational Costs, Tax Prep Fee
Lesson 6 FORM 8843
8843 • Name & TIN—must match exactly • US address only if not filing with 1040NR or 1040NR EZ • Part I • 1a & 1b: Visa = Status, date status acquired and visa number (if any) • 4a & 4b: yes, they must count the days
Form 8843 continued • Part III, Students • 9 the official address and phone of institution • 10 the name, address, and phone of the international director or academic advisor • Signature--only if not filed with 1040NR or 1040NR EZ
Lesson 7 FINISHING THE RETURN
Finishing the Return • 1040NR and 1040NR EZ require a taxpayer identification number for filer and any claimed dependents • Mail 8843 and return together • Every form should have taxpayer’s name and TIN • Attach W-2s and 1042-Ss to front left margin • Remind NRA to Keep copies of everything
The 1040NR EZ Return • Line 3: Wages, salaries, tips, etc • to list on wage line of tax return Box 1 of Form W-2 • Add Code 18 income in box 2 of Form 1042-S • Add Code 19 income in box 2 of Form 1042-S • Minus Treaty benefits • Equals Amount • Line 4: Taxable refunds from state taxes • 1099G (not students from India)
Form 1040NR-EZ • Line 5: Scholarship/Fellowships (Room & Board) • Report all that is not exempt via treaty • U.S. source only • Line 6: Treaty exemption • total exempt salary & scholarship or maximum allowed by treaty--whichever is less • REMEMBER--do not include this amount in lines 3 or 5 • Line 7: • Line 3 + 4 + 5
Form 1040NR-EZ • Line 8: Student loan interest deduction • All these rules must be met: • Paid during tax year • Must have been required to be paid • Filing status must be single • Loan for educational expenses only • Loan recipient must be at least a half-time student.
Form 1040NR-EZ • Line 9: Scholarship excluded • 1042-S Income and exemption codes • Income code 15 scholarship • Exemption 2 (tax code) or no exemption • Line 10: subtract 8 + 9 from 7 • line 11: state taxes withheld • India: Single, $4,750/Married, $4,750 • line 12: subtract 11 from 10 • line 13: personal exemption $3,050