U.S. TAXATION OF FOREIGN STUDENTS

by Paula Singer, Esq.

The application of U.S. federal income tax rules and the availability of income exemptions under the tax law may depend on policy reasons on an individual’s immigration category. This is the case for foreign students in F (academic), J (exchange visitor), and M (vocational) student categories. Depending upon the number of calendar years that foreign students have been in the United States in F, M, J, or Q status since 1985, students may be either a nonresident alien or resident alien for U.S. income tax purposes. The difference is important because different tax withholding rules apply to nonresident aliens.

Substantial U.S. Presence

Under the general rule for U.S. tax residency, foreign nationals are “substantially present,” in the United States if they are present for at least 31 days in the current calendar year, and their U.S. days over 3 calendar years equal or exceed 183 days based on a formula. The 183-day formula considers all of the U.S. days in the current calendar year, plus 1/3 of the U.S. days in the prior year, plus 1/6 of the days in the year before the prior year. Foreign nationals whose presence in the United States satisfies the substantial presence formula are resident aliens and taxed like U.S. citizens.

The 5-Calendar Year Student Exception

For policy reasons, foreign students are nonresident aliens for U.S. income tax purposes for 5 calendar years. Therefore, they are subject to U.S. income tax only on their U.S. income (unless an exception applies), but not on their foreign income. This results from the fact that the U.S. days of foreign students do not count for purposes of determining substantial presence in the United States for 5 calendar years.

The 5 calendar years include all years of presence as an “exempt individual” in F, J, M, or Q status since 1985. Special transitional rules apply to students who were already in the United States in 1985. Calendar years include years in which foreign students spent in the United States in high school, or even as young children accompanying a student parent.

Closer Connection Extension

Foreign students who can support with facts that they are not intending to reside permanently in the United States can extend the 5-calendar year period by attaching a statement to Form 8843. This form is required to be submitted with a students’ income tax return, or separately if no return is required. Although the tax law provides for procedures for requesting a letter from the IRS to support this claim, which would be needed for withholding purposes, effective procedures for requesting such a letter have yet to be implemented by the IRS.

Whether taxes are lower for foreign students who are resident aliens or nonresident aliens depends upon their type and source of income. Foreign students engaged in optional practical training in their 6th calendar year of U.S. presence frequently wish to remain nonresident aliens to avail themselves of the social security and Medicare tax exemption that applies to nonresident aliens in F-1 and J-1 status. However, foreign students who are intending to change status to H-1B Specialty Worker are not eligible for the closer connection extension of their nonresidency status.

Paula Singer, Esq., CEO of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer, Newton, MA has over 25 years of experience providing advice and compliance services to individuals, their employers, and payors on cross-border employment matters.

Watch for Volume 1, Number 6 for a discussion on “Tax Treaty Benefits for Foreign Students.”

Q. If an F-1, M-1, and J-1 student is exempted from social security and Medicare tax as a nonresident alien, does this mean that when a foreign student is working during a break for more than five weeks, and is not enrolled in classes, they are still exempt from FICA?

A. Yes, because there are two separate rules for exemption from social security and Medicare taxes – the student FICA rule under section 3121(b)(10) which applies to all students, citizens and non-citizens alike, and the NRA FICA rule under section 3121(b)(19) which applies to nonresident alien F-1, M-1, and J-1 students. Students can use the rule that is the most advantageous. For foreign students who are nonresident aliens this is the NRA FICA rule because it applies during vacations, optional practical training and periods when students are not enrolled in classes. Once foreign students become resident aliens, they can use the student FICA rule in the same situations as students who are U.S. citizens.

Windstar Welcomes Aboard the Following New Clients:

Argonne National Labs
Franklin W. Olin College of Engineering
National Renewable Energy Laboratory
The University of Texas at Brownsville
Western Kentucky University

Upcoming NRA Training

The important Year End NRA Training is scheduled from November 30 to December 3 at the Boston Marriott Newton.

Sign up now! December NRA Training is an early sell-out!

Windstar Will Dock at Upcoming Trade Shows

Association of Independent Research Institutes 2004 Annual Meeting
Amway Grand Plaza Hotel, Grand Rapids, MI
October 4 - 7, 2004

APA’s Educational Institutions Payroll Conference
The Westin Casuarina, Las Vegas, NV
October 17 - 20, 2004

• Paula Singer will present “Fundamentals of Nonresident Alien Taxation.”
• Together with Lowell Hancock, Tax Specialist, International IRS, Paula will present “Understanding Tax Treaty Benefits and Limitations” and "The Internal Revenue Service's Nonresident Alien Tax Initiatives".
• Gary Singer will present “Forms 1042-S and 1042 Processing.”

NACUBO Tax Forum
Sheraton Chicago Hotel and Towers, Chicago, IL
October 21 - 22, 2004
Windstar is co-sponsoring NACUBO’s annual tax forum with PricewaterhouseCoopers.

Annual International Tax Compliance Workshop
St. Norbert College, De Pere, WI
November 16 - 18, 2004

©Copyright 2004 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.