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But I am not a tax expert! Tax Basics for Assisting International Students and Scholars

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

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But I am not a tax expert! Tax Basics for Assisting International Students and Scholars

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  1. But I am not a tax expert! Tax Basics for Assisting International Students and Scholars Mary Upton Theo Wu

  2. 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.

  3. Overheard Don’t you know that I’m a foreign student? I’m a foreign person. I don’t have to pay any money to your government. But my department’s offer letter says this fellowship is not taxable.

  4. 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

  5. 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

  6. Substantial Presence Test

  7. 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.

  8. 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

  9. IRS Publication 4011 • Pub 4011, IRS Publication 4011, Publication 4011 • Determination tree for SPT

  10. 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

  11. US person • IRS Form 1040 or 1040-EZ OK • TurboTax, TaxCut, etc OK • W-9

  12. Non-US person • Is the payment considered taxable income? • If yes, how much tax? • Institution has an obligation to withhold AND report

  13. IRS Form W-8Ben

  14. Defining Income

  15. Defining Income • Fellowship/scholarships • Qualified Expenses • Room and Board • Salary/wages • Service component • Prize/award • Public competition • Gifts • No strings attached

  16. What is subject to withholding?

  17. Withholding Rate

  18. Withholding Rate • 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

  19. Tax Treaty Benefits, FICA

  20. 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

  21. 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.

  22. 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)

  23. End of the Year

  24. 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?

  25. 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

  26. 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

  27. In review

  28. In review 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

  29. In review

  30. In review NRA require tax withholding on taxable income

  31. 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

  32. 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)

  33. In conclusion • 1042-S must be postmarked by March 15 • 1040NR (individual tax return) due April 15 • 1042 due March 15 • Submitting Form 7004 for the 1042 automatically grants a 6 month extension

  34. Questions?

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