IN THIS SECTION:
Where to Find Treaty Information
An income tax treaty is an agreement between two countries under which each country agrees to limit the application of its domestic tax laws for residents of the other country. Therefore, if you have come to the United States from a country with which the U.S. has an income tax treaty in effect, you should check the provisions of the treaty to see if any of your income is exempt from U.S. tax under the treaty, or is subject to a reduced rate. A treaty provision will generally override U.S. statutory law.
IRS Publication 901, U.S. Tax Treaties, contains summaries of all the U.S. tax treaties in effect. It can be printed from the U.S. Treasury's Forms and Publications site. For updates from the U.S. Treasury on current treaty ratifications, see its Office of Tax Policysite. For the complete text of all tax treaties in effect with the United States go to the IRS Income Tax Treatiespage.
In Publication 901, summary information on special treaty rates for dividends, capital gains, and other non-wage income is in Table 1 beginning on page 31. These rates relate to income that is not effectively connected with a U.S. trade or business, reported on page 4 of Form 1040NR. Summary information on treaty exempt wages and scholarship payments is in Table 2 beginning on page 34. More detailed information is provided for each country in the first part of Publication 901.
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Treaty Benefits for Resident Aliens
Generally, all of the tax treaties to which the U.S. is a party contain a "saving clause," which is meant to prevent residents of the treaty partner who are also citizens or residents of the U.S. from using the treaty to reduce their U.S. tax liability. Therefore, as a general rule, those individuals who qualify as a U.S. resident, under either the green card test or the substantial presence test, are not eligible for treaty benefits. However, most tax treaties contain an exception to the "saving clause" provision for individuals who claim tax treaty benefits as students, trainees, teachers and researchers. Therefore, if you are no longer an exempt individual, income you receive as an F, J, M or Q visa holder might be exempt from U.S. taxation under the treaty with your home country, even if you are classified as a resident for U.S. tax purposes. Treaty benefits could also be available to H, O and other visa holders who become residents for tax purposes during the first year they enter the United States.
How to File Your Return
As a resident, you will file Form 1040, Form 1040A or Form 1040-EZ, whichever applies to you. Attach Form 8833 to explain the treaty benefit being claimed as well as the reliance on an exception to the saving clause. On Form 8833, check the box indicating disclosure under section 301.7701(b) - 7 of the Treasury regulations. You are required to report worldwide income on the return, but may claim the standard deduction, dependency exemptions, and any other deductions and credits to which a resident alien may be entitled. Mail the return to the Department of Treasury, Internal Revenue Service, Austin TX 73301.
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Some Treaty Provision Examples
Following are some examples that demonstrate the procedures you should use to determine your treaty benefits from IRS Publication 901. First, however, here are some definitions of treaty terms:
- Independent personal services: Self-employment income
- Dependent personal services: Wages of employees
- Scholarship or fellowship: Does not include compensation for services
Sue from Belgium
Sue is a nonresident who came to the U.S. from Belgium in 2012 as an F-1 visa holder to study for her master's degree. Sue remained in the U.S. for all of 2015. In 2015 she received a $6,000 scholarship from her university that pays her room and board. She was not required to perform services to receive the money. Sue also received a wage as a teaching assistant of $7,500, and recognized $50 in dividend income from a U.S. corporation, and $10 in bank interest. How should Sue treat the income received for U.S. tax purposes?
Answer: First, Sue must file Form 1040NR rather than Form 1040NR-EZ because she has dividend income, which is not effectively connected with Sue's U.S. trade or business. Tax on this income is computed on page 4 of Form 1040NR, and cannot be shown on Form 1040NR-EZ. Sue should receive a Form 1042-S from the university indicating the tax status of her scholarship payments. However, she should check IRS Publication 901 to determine if the university is treating it correctly.
She will look in Table 2 in Publication 901 and find the summary of the U.S./Belgium treaty for effectively connected income. Scholarship income is no longer listed as a category of income exempt by the treaty. However, under Code 19 (column 2) "Compensation during study or training" is shown in column 3. The payor can be any U.S. or foreign resident (column 5), and the maximum exemption amount allowable is $9,000 p.a. (per annum) (column 6). Therefore, although Sue must include her scholarship income in her gross income, her teaching assistant wages of $7,500 are exempt from taxation under treaty article 19(1)(b) (column 7).
With respect to her dividend income from a U.S. corporation, Sue should look at Table 1 in Publication 901. Table 1 indicates that dividends from a U.S. corporation received by a Belgium resident are taxed at 15% (column 6). Sue should report her dividends on page 4 of Form 1040NR and show that a 15% tax rate applies. Sue should also also report the treaty rate on dividends in Item L on page 5 of Form 1040NR. Bank interest is excluded income and is not reported on the return.
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Julie from France
Julie is an F-1 student from France who arrived in the U.S. in 2011. In 2015 she received a $10,000 fellowship from the University of Minnesota to serve as a teaching assistant. How is her income treated on her U.S. tax return?
Answer: A look at Table 2 in Publication 901 indicates that scholarship and fellowship grants received by French residents are tax exempt for up to five years. However, because Julie is performing services for her fellowship, it does not constitute a scholarship or fellowship for treaty purposes. Because Julie is a student, she should look under "studying and training" to see if an exclusion applies. Note that compensation during study or training received for up to five years from a U.S. (or other foreign) resident in the amount of $5,000 annually (p.a.) is excluded under Article 21(1). This should be shown as code 19 on her Form 1042-S.
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Frederick from Germany
Frederick is a J-1 visa holder visiting the U.S. from Germany to teach and do research at the University of Minnesota. He plans to stay three years and is paid $15,000 per year. How is his income treated on his U.S. tax return?
Answer: Looking at Table 2 in Publication 901, Frederick would qualify for the first two years after his arrival for the exemption under code 18, Article 20(1) (an exemption for teaching generally applies to research too). Note the limit for the exemption is two years. If his stay exceeds two years, the exemption is not lost for the entire period, as was the case before signing of the 2006 Protocol between the US and Germany. However, Frederick is still required to be present only temporarily in the U.S. if his stay exceeds two year. Frederick should submit to the university Form 8233, Exemption From Withholding on Compensation for Independent Personal Services of a Nonresident Alien Individual.
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Ed from Canada
Ed is a J-1 nonresident from Canada doing post-doctorate work at the University of Minnesota. In 2015 he received $12,000 in wages as a teaching assistant. How is his income treated on his U.S. tax return?
Answer: Note that Table 2 of Publication 901 says that up to $10,000 of dependent personal services compensation paid by a U.S. resident (or foreign resident) to a Canadian resident is excludable under Article XV of the U.S./Canada treaty. That might imply that Ed can exclude $10,000 of his $12,000 of wages from income. However, under the explanation on page 3 of Publication 901, if the taxpayer earns more than $10,000 the total amount is taxable. Therefore, Ed cannot exclude any income under the treaty.
The tax rules related to payments to foreign national students and scholars are among the most complex rules in the Internal Revenue Code (IRC). The application of these rules is further complicated by the fact that most of these individuals visit the United States on a school year basis, while U.S. tax rules must be applied on a calendar year basis, and many of these individuals are eligible for tax treaty exemption from tax. Furthermore, special rules apply for withholding and reporting on payments to nonresidents and to exemptions from tax under tax treaties.
A study by the IRS of tax return filings by foreign national students and scholars, determined that a substantial number of these individuals were in noncompliance with their U.S. tax obligations. Many foreign national students and scholars are already being assessed taxes, penalties and interest for failure to file proper tax returns or for filing incorrect tax returns under the IRS program, Compliance 2000. In many cases, improper withholding and reporting by the institutions have contributed to these problems for the individuals.
The Internal Revenue Service (IRS) has been auditing educational and other institutions on withholding and reporting of payments to foreign national students and scholars. Early audits have resulted in the assessment of substantial penalties and interest. Fifty auditors were trained in these complex tax rules in 1995. In October 1995, the IRS began a review of Forms 8233, submitted by individuals through their institutions to request withholding exemptions under tax treaties. Incorrect forms are being rejected by the IRS, and withholding exemptions are not being allowed if a correct form is not submitted. Institutional and individual clients must begin complying with these rules in order to avoid additional penalties and interest for noncompliance, which can be substantial.
Although the withholding and reporting rules on payments to nonresidents are long-standing tax rules, compliance has generally been ignored. The IRS has determined that the lack of compliance results from both a lack of familiarity with these rules and the complexity of the rules themselves. To help alleviate the problem, the IRS has organized the Office of Foreign Payments, charged with enforcing compliance and educating U.S. payors in these matters.
At the October, 1995 Educational Institutions Payroll Conference sponsored by the American Payroll Association, Lowell Hancock, IRS International Issues Specialist announced that the IRS is instituting the Voluntary Compliance on Alien Withholding Program (VCAP), which will allow institutions to file returns for payments to aliens without risking penalties. Schools participating in VCAP will be authorized to claim tax treaty benefits even though the proper exemption claim forms were not filed. The IRS is also working jointly with representatives from the education institutions on a Market Segment Understanding (MSU), which will provide a framework for the treatment of tax issues common to educational institutions.
As a result of these increased audits and educational activities by the IRS, immigration practitioners with institutional clients can expect a growing number of tax questions from the institutions as well as from students and scholars.
Federal Tax System
A foreign national may be taxed as a nonresident, a resident, or a dual-status individual, depending on the individual's U.S. federal tax status during the year. Certain elections may be available to allow a nonresident or dual-status individual to file as a resident, if this results in a lower tax.
Note that the terms nonresident alien and resident alien as used herein are tax terms, not immigration terms. A lawful permanent resident is always a resident alien for tax purposes, while a non immigrant may be a resident alien or a nonresident alien, depending on the individual's visa classification and presence in the United States.
Resident aliens are taxed in the same manner as U.S. citizens. A green card holder who relocates abroad without relinquishing the green card remains subject to U.S. tax obligations in the same manner as a U.S. citizen. A resident alien can use foreign tax credits and the foreign earned income exclusions of IRC 911 to reduce or eliminate U.S. taxes on income from foreign sources. A resident alien who is not from a tax treaty country is not allowed to use the bona tide residence test to qualify for the IRC 911 exclusions.
Nonresident aliens are only taxed on U.S. source income fixed and determinable annual or periodic (FDAP), and income effectively connected to a U.S. trade or business. With few exceptions, U.S. source FDAP income is taxed at a 30 percent withholding rate or lower tax treaty rate. No deductions or exemptions are allowed against this income.
Bank interest of a nonresident alien is specifically exempted from tax by the Internal Revenue Code. The exemption does not apply to income from Cash Management Accounts which are dividends. Capital gains on U.S. securities are exempt from tax if the individual was not physically present in the United States for 183 days or more during the calendar year. Certain portfolio investments targeted to nonresident aliens are also exempt from tax.
Income effectively connected (ECI) with a U.S. trade or business is taxed at graduated rates after taking allowable deductions and exemptions. Compensation for personal services performed in the United States is ECI regardless of the location or currency of payment with one exception, compensation is not considered U.S. source if:
- the recipient is temporarily in the U.S. for 90 days or less in the calendar year,
- the compensation does not exceed $3,000 in the aggregate, and
- the services are performed for a foreign person or entity or for a place of business maintained in a foreign country by a U.S. person or entity.
Scholarships and fellowship grants are considered ECI. A lower withholding rate of 14 percent applies to certain grants. Compensation paid to a nonresident alien temporarily in the U.S. is exempt if the individual:
- is in the U.S. as an F or J exchange visitor, and
- is paid by a foreign person or entity or by a place of business maintained in a foreign country by a U.S. person or entity.
Special rules apply to sales of U.S. real property by nonresidents. Proceeds from such sales are subject to a 10 percent withholding tax. The gain is taxed at graduated rates. The lower rate for capital gains does not apply. The gain is subject to an alternative minimum tax of 24 percent on the net gain if the regular tax is lower.
A foreign national is a dual-status taxpayer in any year in which the individual changes his or her resident status from nonresident to resident alien or from resident to nonresident alien. The individual is taxed as a nonresident during the nonresident period and is taxed as a resident during the resident period. A dual-status individual cannot claim the standard deduction. A married dual-status individual must use married filing separately rates.
A foreign national is a resident alien for U.S. federal tax purposes if he or she meets either the lawful permanent resident ("green card") test or the "substantial presence" test. An individual who is present in the United States less than 183 days in the calendar year but who meets the substantial presence test (i.e., days present in United States during the current year, plus 1/3 of days in preceding year, plus 1/6 of days in second preceding year) is not a resident if the individual meets the "closer connection" test: the individual has a tax home in a foreign country or countries for all of the calendar year, and a closer connection to a foreign country than to the United States.
An individual cannot use the closer connection exception if the individual has taken steps to obtain lawful permanent resident status. To claim the closer connection exception, the individual must file Form 8840, Closer Connection Exception Statement for Aliens by June 15 (by April 15 with Form 1040NR or 1040NR-EZ if the individual has income subject to wage withholding).
These tax rules do not apply to a foreign national who is also a U.S. citizen. In that case, the individual is taxed as a U.S. citizen regardless of the fact that the individual is also a citizen of another country.
A foreign national who fails to meet the substantial presence test may elect to be taxed as a part-year resident if the individual:
- is a resident in the following year;
- is physically present for a consecutive 31-day period in the year; and
- beginning with the first day of the 31-day period and ending with the last day of the election year, is physically present in the United States 75 percent of the time.
Such an election is typically made to increase the allowable deductions for mortgage interest and real estate taxes paid during the resident period and to claim additional personal exemptions.
A nonresident alien or a part-year resident alien who is married to a U.S. citizen or resident alien on December 31 may make an election to be taxed as a resident for the full calendar year and file a joint return with his or her spouse. The election allows the individual's income to be taxed at married filing jointly rates, the lowest rates, rather than at married filling separately rates, the highest rates. An individual who makes this election must include worldwide income in the return from January 1 of the tax year. If the individual paid or incurred foreign income taxes during the year, he or she can claim foreign tax credits to offset U.S. taxes attributable to foreign earnings included in the return. An individual who makes this election loses any tax treaty benefits to which he or she may have been entitled.
An individual who is in the United States as an F-1 or a J-1 student is exempt from counting the days of physical presence for purposes of the substantial presence test for 5 calendar years. For purposes of this limitation, partial years count as calendar years. Years of presence in the United States prior to 1985 are ignored for purposes of this exemption. The individual is exempt from counting the days of presence; the individual is not exempt from tax.
An F-1 or a J-1 student may be exempt from counting the days of U.S. presence beyond the 5th calendar year if the individual establishes that he or she does not intend to reside permanently in the United States. The individual must submit a statement giving supporting facts and circumstances with his or her Form 1040NR or 1040NR-EZ tax return. These same limitations apply to Q-1 visa holders from October 1, 1994, and to M-1 students. The rules apply to family members on derivative visas based on that individual's years of U.S. presence in that classification.
An individual who is in the United States as a J non-student is exempt from counting the days of physical presence for purposes of the substantial presence test if he or she has not been in the United States as an F, a J or an M student or as a J or Q non student for two of the six prior calendar years. For purposes of this limitation, partial years count as calendar years. Days spent in the United States as a Q cultural visitor prior to October 1, 1994, are ignored, as are years of presence in the United States prior to 1985.
If all of the individual's remuneration has been from non-U.S. sources the two-year limitation is increased to four years. The individual is exempt from counting the days of presence; not from tax. These same limitations apply to Q visa holders from October 1, 1994. The rules apply to family members on derivative visas based on that individual's years of U.S. presence in that classification
Tax treaty benefits
United States has tax treaties with several countries the list of United States Income Tax Treaties. The most up to date list is available from the IRS.
By definition, tax treaties apply to federal income taxes imposed by the IRC. Generally, they do not apply to social/security taxes. More recent treaties specifically exclude social security taxes or employment taxes from the taxes covered. However, the treaty with the Former USSR, which now covers most CIS countries and Georgia is an exception. This treaty applies to "taxes and dues provided by the Internal Revenue Code." The Treasury Explanation for this treaty notes that it does apply to social security taxes. Social security taxes may be covered by a social security ~totalization) agreement, which is discussed below.
Tax treaties may apply indirectly to state income taxes because of the interrelationship between federal income and income for state income tax purposes. Most states use income or taxable income for federal tax purposes and add back adjustments. Some states, such as Connecticut, add back treaty exempt income and tax it. Each state's tax laws must be reviewed to determine whether a treaty exempt income is exempt for state income taxes as well.
A tax treaty applies to individuals who are residents of one or both of the tax treaty countries. Residence does not refer to legal residence but rather to tax residence, although the two may be the same. The determination of residency for treaty purposes considers first a person's liability to tax under the internal laws of the respective tax treaty country. Tax treaty definitions of residency make it clear that a person liable to tax only on income sourced in the treaty country is not treated as a resident for treaty purposes.
The period when a person must be a resident of the treaty country in order to claim treaty benefits varies with the article of the treaty under which the person is claiming benefits. Most articles conferring benefits on students, trainees, teachers, and researchers make it clear that the person must be a resident of the treaty country at the beginning of the visit. Articles providing tax exemption for income from self-employment (Independent Personal Services) and employment (Dependent Personal Services) require the person to be a resident of the treaty country throughout the benefit period.
If a person is a dual resident, that is a tax resident of both the treaty country and the United States, most treaties include a residency tie-breaker rule that assigns residence to one country based on the tie-breaker criteria. The tie-breaker rule typically consists of a hierarchy of criteria such as permanent home, center of vital economic interests, habitual abode, and nationality or citizenship. If none of the criteria is controlling, residency must be determined by the competent authority process described in Revenue Procedure 96-13.
A resident of the United States who is claiming to be a nonresident under a treaty tie-breaker rule must submit Form 8833, Treaty-Based Return Disclosure, with his or her Form 1040NR or 1040NR-EZ tax return and certify to the facts and circumstances that are the basis for treaty country residence result under the tie-breaker rule.
Most treaties include a saving clause that reserves the right of the United States to tax its citizens and residents, notwithstanding any treaty provision to the contrary. A citizen includes a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of U.S. tax.
The determination of residency under the residency clause and the residency tie-breaker rule applies for purposes of the saving clause. Not all treaties include residents in the saving clause, however. Most treaties include exceptions to the saving clause, which typically apply to benefits intended to be granted to persons temporarily in the United States, such as benefits granted under the student and teacher articles. An individual who is a resident for U.S. tax purposes and is entitled to benefits as a student or teacher under a treaty with this exception may claim the benefits on a Form 1040 tax return. See special filing instructions below. Most treaties include a provision denying these exceptions to U.S. citizens and lawful permanent residents.
All treaties include an article providing treaty benefits to students. Most such articles include trainees or business apprentices as well. Benefits are limited to individuals in the United States solely for or for the primary purpose of their education or training. According to the Treasury Explanations, "solely" and "for the primary purpose" means full time education or training. Most articles limit benefits to students studying at an accredited educational institution. An educational institution is defined as one maintaining a regular faculty, an established curriculum, and having an organized body of students in attendance.
Benefits conferred by the student article vary by treaty. All articles exempt payments from abroad for an individual's education, training, or maintenance. Some treaties exempt from tax scholarship and fellowship grants, regardless of the source, U.S. or foreign. Some treaties include an exemption from tax for compensation paid by a U.S. employer. Amounts vary by treaty, from $2,000 to $5,000. Amounts exceeding the exemption in the taxable year are subject to tax.
All student articles include a limitation on the period of time that an individual can claim treaty benefits. Most limit benefits for the reasonable period needed to complete the education or training. Many treaties limit the benefits for five years. Some treaties apply the limit to taxable years; others to elapsed years. Most treaties apply the limit for consecutive years from the date of arrival. Some treaties combine the year limitation with the teacher article to limit the combined period of benefits to five years.
Some student articles include treaty benefits for U.S. compensation for services for participants in programs sponsored by the U.S. government. These benefits are not intended for individuals in the United States, under a general cultural agreement with the United States. Many student articles include treaty benefits for compensation paid to an individual by a treaty country resident while the individual is in the United States studying or acquiring technical, business, or professional experience.
About three-quarters of the treaties provide benefits for teachers and professors. Most of the articles include researchers as well. Benefits are limited to research performed for the public benefit. To be eligible for benefits, individuals must meet the criteria of the treaty article, which typically include:
- a temporary visit at the invitation of a government agency or educational institution;
- the primary purpose of the visit is for teaching or engaging in research (at least 60 percent of the individual's time must be spent in the activity); and
- the teaching or research is at an accredited educational institution or, depending on the treaty, at another type of institute, such as a scientific research institute.
Compensation for the teaching or research is exempt from tax for a specified period of time, typically two years from the individual's date of arrival. Two treaties, Greece and China, allow a three-year benefit. Some treaties exempt from tax the income earned during the treaty period; most exempt the income paid during the treaty period. All treaties include limitations on the length of the benefit period but not limitations on the benefit amount. Under the teacher/researcher articles of the treaties with Germany, India, the Netherlands, and the United Kingdom, benefits are lost retroactively if the individual overstays the treaty period in the United States.
Newer treaties, such as the treaty with the Slovak Republic, limit the treaty benefit to one-time. Older treaties, such as the treaty with the United Kingdom, allow multiple benefits if the individual reestablishes his or her tax residency and physical presence in the treaty country for a substantial period (typically one year) before claiming benefits again. Many treaties combine the benefit period under the teacher article with the student article and typically limit the combined benefit period to five years.
Some treaties specify taxable years; some specify elapsed years from date of arrival. Many treaties do not allow teacher/researcher benefits if an individual has enjoyed the benefits of the student article in the immediately preceding period. Newer treaties, such as the tax treaty with the Slovak Republic, limit claiming treaty benefits consecutively under the teacher/researcher article and vice versa.
Income from employment
All treaties include an article (called "Dependent Personal Services") exempting from tax income from employment paid to a resident of the treaty country if certain criteria are met. Criteria vary by treaty, but typical criteria are:
- The individual's presence in the United States does not exceed a certain number of days in the calendar year;
- Remuneration is paid by or on behalf of an employer who is a resident of the treaty country; and
- The remuneration is not borne (i.e. taken as a deduction) by a permanent establishment or fixed base in the United States.
Newer treaties use a 12-month time period that begins or ends in the calendar year, rather than the calendar year for the benefit period. Several older treaties allow a tax exemption if remuneration does not exceed a specified amount and time spent in the United States does not exceed a specified period. The exemption is lost if either is exceeded.
The treaty with Canada allows a tax exemption on up to $10,000 of remuneration paid in the calendar year, regardless of the pay or's residence. The benefit is lost completely if the $10,000 amount is exceeded.
All treaties also include an article (called "Independent Personal Services") exempting from tax income from self-employment paid to a resident of the treaty country if certain criteria are met. Treaty articles typically specify that payments must be for personal services in "an independent capacity." This includes all personal services performed by an individual for his or her own account, where he or she receives the income and bears the risk of loss arising from the services. Generally, such services include those performed by a sole proprietor, but not those performed by an employee. Criteria vary by treaty and may include any combination of the following:
- The individual lacks a fixed base (i.e., an office) in the United States;
- The individual maintains a fixed base that does not exceed the period of time allowed by the treaty;
- The individual's time in the United States does not exceed the period of time allowed by the treaty; and
- Compensation paid to the individual during the specified period does not exceed a specified amount; the exemption is lost completely if the amount is exceeded.
As with Dependent Personal Services, some newer treaties use a 12-month time period that follows the calendar year, rather than the calendar year for the benefit period. Most newer treaties also include a tax exemption on income up to a certain amount for payments made to artists or athletes, regardless of the above criteria.
Payments to Freign Students and Scholars
In general, the federal withholding and reporting rules on payments made to foreign nationals depend on: whether the individual is a resident alien or a nonresident alien; whether the individual is claiming an exemption from tax under a tax treaty; and the type of payment-scholarship or fellowship grant, compensation for employment, or compensation for self-employment services.
Those portions of a "qualified" scholarship or fellowship grant that are used to pay for tuition, fees, books, supplies, or required equipment generally are not taxable. Any portion of the scholarship or fellowship grant used to pay for items other than those listed are taxable. Stipends paid to individuals that require the recipient to perform services in order to receive the stipend are taxable as wages as described below.
All amounts paid to resident aliens in the form of scholarships, fellowship grants or financial aid are not required to be reported by the payors. There is no income tax withholding on these payments, even if the amounts are taxable.
All amounts paid to nonresident aliens in the form of scholarships, fellowship grants or financial aid are reportable on Form 1042S, regardless of the amount paid and regardless of whether it is taxable. The institution must submit a Form 1042 tax return to the IRS to report the withheld amounts. In general, all amounts paid to nonresident aliens in the form of taxable scholarship or fellowship grants are subject to federal income tax withholding at a rate of 30 percent, unless an exception applies. For instance, payments made to or on behalf of nonresident aliens temporarily in the United States on an F-1, J-1, M-1 or Q-1 visa are subject to withholding at a 14 percent rate.
No withholding is required on grants made to students and trainees that originate with the U.S. Agency for International Development, to the extent that such grants consist of "amounts of per diem for subsistence." Any amount that exceeds a reasonable amount for subsistence (food and lodging), or any amount that is for something other than subsistence, is subject to withholding. A reasonable amount for subsistence is usually measured with reference to the U.S. government per diem rates in effect for the respective locality.
Any nonresident alien who claims that part or all of a scholarship or fellowship grant is exempt from tax under a tax treaty must submit IRS Form W-8. This form is valid for three calendar years, unless the treaty exemption expires before then. The pay or is responsible for monitoring the treaty eligibility period and for withholding at 14 percent or 30 percent on the taxable portion of the scholarship or fellowship grant after the eligibility period has expired. Scholarship and fellowship grants that originate from sources outside the United States are not taxable to nonresident aliens, nor are they reportable on Form 1042S. Foreign source scholarships and fellowships include those paid by a U.S. agent acting on behalf of the foreign source pay or, and those originating with international organizations as defined by IRC 7701(a)(19). The Revenue Procedure 88-24 provides an alternative withholding procedure for withholding tax on scholarship and fellowship grants, by allowing certain deductions and withholding at graduated rates for purposes of determining the tax to be withheld.
Compensation for Employment Services
For withholding tax purposes, payments to resident aliens are subject to the same rules as payments to U.S. citizens. Special withholding rules apply to the completion of Form W-4 by a nonresident alien. For instance, the individual cannot claim exempt status; may claim only single, regardless of marital status; and may claim only one exemption, with exceptions for residents of Canada, Mexico, Japan, Korea, and U.S. nationals, and for students from India, Barbados, Jamaica, Hungary, and Malta. Moreover, the individual must include an additional $4.00 per week of withholding. This amount makes up for the standard deduction included in the withholding tables, but is not allowed as a deduction for nonresident aliens. Students from India are allowed to claim the standard deduction under the treaty with India.
Individuals who do not submit a proper Form W-4 are subject to withholding at single rates with no exemptions. Special withholding and reporting rules apply to individuals exempt from federal income tax under a tax treaty. First, an individual claiming a tax treaty exemption from withholding must submit Form 8233 with an appropriate certifying statement to the pay or. Second, compensation payments that are exempt from tax under a tax treaty must be reported on Form 1042S. The excess of any amount paid that is not exempt must be reported on Form W-2. The revenue procedures establishing these procedures, however, do not give any guidance on the rules for treaty exemption for payments made to resident aliens who are nevertheless exempt from tax under a treaty. Presumably, the same procedures as those for nonresidents can be used. The withholding exemption certifying statement may require the addition of a statement as to the preservation of the treaty benefits under the saving clause.
Nonresident students and scholars on F-1, J-l, M-l, or Q-l visas are exempt from U.S. Social Security and Medicare taxes, provided the services rendered are consistent with the purposes of their visas. Their remuneration is also exempt from Futa tax. Resident aliens on these visas are subject to U.S. Social Security and Medicare taxes. The exemption does not apply to nonresident students and scholars who are employed in violation of the INS rules relating to the immigration classification. Resident and nonresident students employed on campus, however, are exempt from social security taxes under the same rules that apply to U.S. citizens.
Amounts paid to individuals who visit the United States temporarily for the purpose of giving lectures, giving live performances, doing research, or performing other services on a short-term contractual basis are treated as self-employment income. Such amounts paid to a resident alien are subject to reporting on Form 1099 as non-employee compensation if the amount exceeds $600 in the year. Such amounts paid to a nonresident alien are subject to withholding tax at a rate of 30 percent and are reported on Form 1042S, regardless of the amount of the payment.
Any nonresident alien who claims that all or part of the compensation is exempt from tax under a tax treaty must submit Form 8233, stating the treaty article under which the exemption is claimed and the facts and circumstances supporting such claim. Nonresident aliens are not subject to U.S. self-employment taxes on income from self-employment.
The United States has entered into social security (totalization) agreements with seventeen countries. Under such an agreement, an individual who is temporarily on an employment assignment to the United States may be exempt from U.S. Social Security and Medicare taxes. A temporary assignment is one anticipated to last less than five years.
An individual who wishes to claim exemption from U.S. Social Security taxes under a totalization agreement must secure a Certificate of Coverage from the Social Security agency of his or her home country as proof of coverage in the home country system. The Certificate is submitted to the employer and not to the IRS.
State Income Taxes
A foreign national's federal tax status is not determinative of his or her state tax status. The imposition of state income taxes on individuals depends on the tax rules of each particular state. A resident alien can be a nonresident or a resident for state income tax purposes, as can a nonresident alien.
In general, state residents are subject to state income tax on worldwide income, while nonresidents are taxed on state source income only. State residents who are resident aliens are taxed on income from worldwide sources. State residents who are nonresidents for federal tax purposes are typically taxed on only U.S. source income, since states tie the definition of income to the federal rules.
State withholding and reporting rules for payments to residents and nonresidents are generally the same for foreign national residents as they are for U.S. citizen residents and nonresidents of a state. Withholding and reporting on payments to nonresidents may follow different rules, such as the reporting of all payments to nonresidents on Form 1042S.
A resident alien files a Form 1040 or 1040EZ tax return, which is due April 15. If the individual is residing abroad and has a tax home in a foreign country, the tax return due date is automatically extended to June 15. A foreign national who must file as a resident may nevertheless be entitled to tax treaty benefits. To claim tax treaty benefits on Form 1040, the individual must attach a completed page 5 of the Form 1040NR to the return, write "Tax treaty exemption pursuant to the tax treaty with (give the country)" at the top of page 1 of the return, and send the return to Internal Revenue Center, Philadelphia, PA.
A nonresident alien files a Form 1040NR or 1040NR-EZ tax return which is due June 15, unless the individual has income subject to wage withholding, in which case it is due April 15. If an individual's income is exempt by tax treaty, a tax return must still be filed to claim the tax treaty exemption. An individual in the United States in an F, J, Q, or M immigration classification must file a Form 1040NR-EZ with a Form 8843, even if he or she has no income. All returns are filed in the Internal Revenue Service Center in Philadelphia, PA. If a nonresident alien does not timely file a return, deductions and credits are disallowed. Timely filed for purposes of this rule is within 16 months of the original due date of the return.
A dual-status individual files a dual-status tax return unless he or she has made a full-year election to file a tax return with a U.S. citizen or resident spouse. Which return is filed depends on the individual's tax status on December 31, nonresident or resident. An individual who is a resident as of December 31 should submit Form 1040 with a Form 1040NR Statement. An individual who is a nonresident on December 31 should submit Form 1040NR with a Form 1040 Statement. For a more detailed discussion of these returns, see IRS Publication 519, U.S. Tax Guide for Aliens.
A foreign national departing from the United States is required to obtain a certificate of compliance, or "sailing permit." To do so, the individual must have paid all prior years' taxes and must pay all taxes due on his or her income subject to U.S. taxes during the year of departure. The individual must file Form 1040C or Form 2063 with the appropriate IRS office.
The requirement that all taxes be paid before departure can be satisfied by a letter from a U.S. employer guaranteeing payment of taxes owed. Obtaining the sailing permit does not relieve the individual of submitting a tax return for the year of departure after the end of the calendar year when forms are available.
A foreign national in any one of the following categories is not required to obtain a sailing permit:
- Representatives of foreign governments with diplomatic passports;
- Employees of foreign governments and international organizations and members of their households; or
- Foreign students, trainees, and exchange visitors, including dependents on derivative visas, who receive no income from U.S. sources other than:
- reimbursements, or benefits-in-kind for travel,
- maintenance and tuition;
- income from employment authorized by the Immigration and Naturalization Service (INS); and
- certain interest income.
A sailing permit can be obtained at an IRS center with a Taxpayer Services Office. Failure to obtain the sailing permit can result in delays upon departure, though that rarely occurs.
Whether or not a foreign student or scholar is required under U.S. law to file taxes depends on particular circumstances of their residency in the United States and the source of funds that they are receiving. To understand their obligations a wealth of information is available on-line from the IRS, the State Department, and the Immigration and Customs Enforcement . Additional help may be available from the education or employment institution that the student or scholar is associated with. Seek information early, to minimize any complications that may arise.