U.S. Income Taxation of Foreign Students, Teachers, and Researchers , written by Bertrand M. Harding, Jr., Esq., analyzes the U.S. income tax laws applicable to nonresident alien students, teachers, and researchers who are living, working, and/or studying in the United States. To a limited extent, resident alien students, teachers, and researchers qualify for special tax benefits not accorded to other resident aliens, and this Portfolio discusses those situations as well.
This Portfolio discusses and applies the general principles of nonresident alien taxation, as specified in the Internal Revenue Code of 1986 and the regulations promulgated thereunder, to foreign students, teachers, and researchers. While these individuals and the entities making payments to them are generally subject to the same nonresident alien tax principles applicable to other nonresident aliens, the nature of the individual's status as a student, teacher, or researcher often leads to tax treatment quite different from that accorded other nonresident aliens.
Classification of non-U.S. citizens as either resident aliens or nonresident aliens is made using the green card and substantial presence tests. The substantial presence test depends on the number of days that the alien is physically present in the United States, but the Code exempts certain classes of foreign citizens from having to count days toward this test for a specified period of time. Foreign students, teachers, and researchers generally qualify for this special status for a period of time that varies depending on the individual's visa status.
Nonresident alien students, teachers, and researchers are generally subject to U.S. income tax in the same manner and extent as other nonresident aliens. That is, they are only taxed on their income that is effectively connected with a U.S. trade or business and on certain non-effectively-connected, U.S.-source gross income. Nonresident alien students, teachers, and researchers, however, face unique questions not applicable to other nonresident aliens, and these issues are discussed in this Portfolio.The Internal Revenue Code contains a separate income and FICA tax regime for foreign individuals, i.e., nonresident alien individuals (sometimes simply referred to as “nonresident aliens”). Such individuals are non-U.S. citizens who are not classified as resident aliens under the rules set forth in §7701(b).This separate tax regime for nonresident alien individuals covers not only the manner in which they are taxed, but also the rules by which income and FICA tax must be withheld and reported by entities making wage and other payments to them. Within the universe of nonresident alien individuals who are living, working, and/or earning income in the United States are students, teachers, and researchers who have come to this country to advance their education and knowledge and, in some cases, earn compensation for services rendered.
U.S. Income Taxation of Foreign Students, Teachers, and Researchers draws upon the principles and concepts discussed in other Portfolios and applies them to the specific tax issues applicable to foreign students, teachers, and researchers and the entities making payments to them. Appropriate references are made to these other BNA Portfolios where the reader might benefit from a broader and more in-depth treatment of the general topic.
U.S. Income Taxation of Foreign Students, Teachers, and Researchers allows you to benefit from:
This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 90 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource service offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in more than 40 foreign countries, Branch ProfitsTax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more.
Detailed Analysis
I. Introduction
II. Classification as a Nonresident Alien
A. General Rules
B. Green Card Test
C. Substantial Presence Test
1. General Rule
2. Closer Connection Exception
3. Computing Days of Presence in the United States
4. Disclosure Statement
5. Illegal Aliens/Asylum Status Aliens
6. Residency Starting and Ending Dates
a. Residency Starting Date
b. Residency Ending Date
7. Election to Treat Spouse as a Resident Alien
D. Coordination of Residency Rules with Income Tax Treaties
III. Income Taxation of Students, Teachers, and Researchers
A. Background
B. Nonresident Alien Students
1. Scholarship/Fellowship Grants
a. Distinguishing Grants from Gifts, Loans, Prizes/Awards, and Compensation
(1) Grant Versus Gift
(2) Grant Versus Loan
(3) Grant Versus Prize/Award
(4) Grant Versus Compensation
b. Source of Grants
c. Taxation of Grants
d. Section 117 Exclusion
(1) The "Qualified Scholarship" Requirement
(2) The "Educational Organization" Requirement
(3) The "Candidate for a Degree" Requirement
e. Income Tax Treaty Exemptions
(1) The Residency Requirement
(2) Classification as Student or Teacher/Researcher
(3) Student Exemption Articles
(4) Student Articles in Russia, Kazakhstan, and Ukraine Income Tax Treaties
2. Compensation for Services Rendered
a. Source of Income
b. General Rule of Taxation
c. Income Tax Treaty Exemptions
3. Savings Income
4. Deductions, Credits, and Rates for Nonresident Alien Students
a. Deductions
b. Tax Credits
c. Rates
C. Nonresident Alien Teachers and Researchers
1. Compensation for Services Rendered
a. In General
b. Exclusion for Certain Exchange or Training Program Participants
c. Exclusion for Foreign Government/International Organization Employees
d. Payments to Foreign Guest Lecturers
(1) Residency Requirement
(2) Primary Purpose Requirement
(3) Educational Institution Requirement
(4) Time Period of Exemption
(5) Status as Teacher/Researcher Before Coming to the United States
(6) Compensation Versus Fellowship Grant
(7) Dependent and Independent Personal Services Articles
2. Tuition Waivers
a. General Rule
b. Graduate Tuition Waivers
c. Tuition Waiver Versus Compensation
3. Other Income
4. Deductions, Credits, and Rates for Nonresident Alien Teachers and Researchers
D. Resident Alien Students, Teachers, and Researchers
IV. Social Security Taxation of Nonresident Alien Students, Teachers, and Researchers
Introductory Material
A. The Nonresident Alien FICA Tax Exemption
B. The Student FICA Tax Exemption
C. Impact of Income Tax Treaties
D. Social Security Totalization Agreements
V. Income Tax Withholding on Payments made to Nonresident Alien Students, Teachers, and Researchers
A. Basic Concepts
1. "Withholding Agent"
2. "U.S.-Source Income"
3. "Foreign Person"
4. "FDAP"
5. Classifying the Type of Payment Made
B. Exceptions to Withholding
1. ECI
2. Wage Payments
3. Per Diem Payments Under U.S. AID Contracts
4. Income Exempt Under the Code
5. Income Exempt Under an Income Tax Treaty
a. Form 8233
b. Form W-8BEN
c. Form W-9
d. Form 8833
e. TIN Requirement
C. Amount of Tax to Be Withheld
1. Wages
2. Scholarship/Fellowship Grants
a. General Rules
b. Reduced Withholding Procedures
3. Income Subject to a Special Treaty Rate
D. Special Situations and Problems
1. Social Security/Individual Taxpayer Identification Numbers
2. Situations Where Tax Cannot Be Withheld from the Payment
E. Reporting Requirements for a Withholding Agent
1. Form 1042
2. Form 1042-S
3. Filing Requirements
a. Who Must File
b. Where and When to File
c. Electronic and Magnetic Media Requirements
d. Penalties for Failure to File
F. Reporting Requirements for a Nonresident Alien Student, Teacher, or Researcher
Working Papers
Table of Worksheets
Worksheet 1 List of Relevant IRS Forms and Publications
Worksheet 2 List of Relevant IRS Guidance
Worksheet 3 Summary Table of Student Tax Treaty Provisions
Worksheet 4 Summary Table of Teacher/Researcher Tax Treaty Provisions
Worksheet 5 IRS Letter to Coopers & Lybrand, LLP
Bibliography
OFFICIAL
Statutes:
Treasury Regulations:
IRS Procedures and Rulings:
Cases:
UNOFFICIAL
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