General Tax Information for International Persons
Federal Income Taxation for: Employment Income and Scholarship Awards
It is very important to understand the distinction between immigration and taxation rules with regard to the definitions used. International person that have met either, the Substantial Presence Test (SPT) that is a calculation of days present in the U.S., or that have obtained a Green Card, are treated as Resident Aliens (RA) for the IRS taxation purposes. However, a person that has only met the SPT is still considered a Non-Resident Alien for immigration purposes. A person that has obtained a Green Card has also become a Legal Permanent Resident (LPR) for immigration purposes and typically will apply for U.S. Citizenship at some future date.
LPR’s and persons that have met the SPT are treated as residents for taxation purposes and are required to pay taxes and have the taxes withheld from any payments they receive according to IRS regulations. However, having met the SPT test or having a Green Card does not mean that a person has become a citizen of the U.S. for immigration purposes.
Federal Tax Reporting
It is the responsibility of each individual to understand and determine if they need to file a tax return and should consult with a tax specialist or tax consultant if needed. Generally, all NRA’s receiving income, including unqualified scholarships, fellowships or grants, from a source in the United States, or for services they have provided in the Unites States must file a tax return with the Internal Revenue Service annually or for the year they received the income. NRA individuals present in the United States under an F, J, M, or Q visa must file a federal form 8843 even if they do not have U.S. source income.
Federal tax returns are generally due for any given calendar year by April 15th of the following year. NRA’s will generally file tax return IRS tax Form 1040NR or 1040NR-EZ. Once an NRA meets the tests for becoming a Resident Alien for tax purposes they may file IRS tax Form 1040, 1040-EZ or 1040A. However, if an NRA becomes a Resident Alien for tax purposes that is still eligible to claim treaty benefits must file Form 1040NR to claim the treaty benefits.
Students that receive scholarship awards may receive a Form 1042S tax statement to identify unqualified amounts paid to them that are subject to taxation or for amounts exempted due to provisions of a tax treaty between their home country and the United States. Individuals who receive wages will generally receive a Form W-2 to report salary and wage earnings and amounts withheld as taxes. Salary and wages that may have been exempted by a tax treaty would necessarily be reported on Form 1042S.
The taxation rules and tax rates that apply to international persons are different than the rules and tax rates that apply to U.S. citizens. International persons that earn income from being paid a salary or wages through work at the University or who receive scholarships that are in excess of their qualified educational expenses must pay federal income taxes unless such income is exempted under a U.S. tax treaty with the individuals home country. Not all countries have tax treaties with the U.S.. Individuals claiming exemption under a tax treaty must have either, a Social Security Number (SSN) or an Individual Tax Payer Identification Number, (ITIN) to be eligible to claim a treaty exemption. The amount of income that is taxable and the percentage of taxes withheld depend in part on whether you are a resident alien or a nonresident alien for tax purposes and a variety of other criteria that may apply. That is why it is important to have an appointment with the University’s Payroll Department to review each person’s situation and ensure that the proper documentation is obtained to qualify the person to the best benefit possible.
Withholding for RA’s and NRA’s that are allowed to work in the U.S. are required to pay taxes just as a U.S. citizen will be and the University will withhold a portion of their income each time a payment is made and submit the amount withheld as federal taxes to the federal government on behalf of the employee.
The amount withheld is computed based on your income level and the on the bases of how the W-4 form is completed for withholding on employment income. However, those individuals that are in an NRA status may not claim more than being Single with one dependent (themselves) on the W-4 form. If the person’s status is considered to be Non- Resident Alien, the tax rate will be based on the standard payroll tax tables. Individuals that meet or are qualified as an RA for tax purposes, may opt to complete the W-4 form according to their actual personal situation that may apply. Accordingly, an RA that is married may claim themselves, their spouse and dependent children on their W-4 form. Withholding for an RA would also be based on the standard payroll tax tables that apply. Taxes based on employment income are always generally regulated by the IRS and Federal Tax Tables.
Scholarship Awards for Students
Just as the taxation for Employment Income is different for RA’s and NRA’s, the taxation of Scholarship Awards are also different. Resident Alien (RA’s) students are treated for taxation purposes based on the same criteria as would a student that is a U.S. citizen. However, the taxation for an NRA is based on several factors, including:
- The number of years they have been in the U.S.
- Whether or not there is a tax treaty with their country and how taxes are treated within the treaty.
- The source of the scholarship payment that they receive.
- Whether or not there are any conditions on the scholarship award.
- Whether or not there are any amounts of the scholarship that exceed the qualified expenses of attendance to the University.
Generally, an NRA will pay taxes on the unqualified portion of scholarships at the rate of 14%. However, scholarship awards may be exempted from federal and state income tax pursuant to an income tax treaty between the United States and their country of residence if a treaty exists. A current list of countries that have tax treaties with the United States can be found in IRS publication 901. Students that wish to receive the benefit of a tax treaty to their Scholarship Award must complete IRS Form W-8BEN. Remember that you must have either social security number, or an ITIN to qualify for a treaty exemption.
According to the IRS regulations: “In general, those portions of a scholarship, fellowship, or grant used to pay tuition, fees, books, supplies, or equipment are classified as a ‘Qualified Scholarship’ and are not includible in the gross income of the recipient under IRC section 117.”
Educational expenses that are considered “qualified” are exempted from taxation include:
- Fees required for all students.
- Books, supplies, and equipment.
- However, the above expenses are required to be deducted directly from the scholarship award prior to the student receiving the funds to qualify.
Unqualified Educational Expenses that are taxed would include items such as:
- Housing or Dormitory living expenses.
- Meal plans.
- Cash payments made directly to the student are always taxed.
Please note that the question of Qualified and Unqualified Expenses applies to full time students regularly enrolled in a degree program. For non-degree seeking persons the entire amount of the scholarship is applicable to taxation regardless of what may be considered to be Qualified or Unqualified.