US Taxation on Foreign Students: An Overview

After admission, a student needs a valid visa to enter the US. Global students are typically issued “F,” “J,” “M,” or “Q” visas. This article provides foreign students with a comprehensive overview on some important tax aspects that they should take into account, such as tax residency status, tax implications and capital gains.

tax residency status

For tax purposes, a person is considered to be a resident of the US if he or she meets an adequate attendance test for any calendar year. Thus, a person must be physically present in the US at least:

1.) 31 days during the current calendar year; And

2.) 183 days during a period of three years including the current year, the preceding year and the year preceding it, as given below:

a. all days in the current calendar year, and

NS. 1/3 of the days in the preceding calendar year, and

C. 1/6 of the number of days present in the year preceding the preceding calendar year

However, there are exceptions to this rule. If the person is an “exempt person,” the U.S. government will be eligible for the purposes of the Adequate Attendance Test. The days of attendance are not considered.

According to the U.S. Internal Revenue Service (IRS), a foreign student temporarily in the U.S. under an “F,” “J,” “M,” or “Q” visa who substantially complies with the visa requirements may be granted a is believed. “Personal Exemption” for US tax purposes for specified calendar years.

A foreign student is considered to have adequately complied with visa requirements if he has not engaged in activities that are prohibited by US immigration laws that may result in the loss of his visa status. Based on this, foreign students with an applicable visa type, such as an F-1 visa, are exempted from the substantial attendance test for five calendar years and may be treated as a non-resident alien (a non-US citizen who has not passed the green card test). considered in. Sufficient Attendance Test) for those calendar years.

It’s worth noting that five calendar years need not be consecutive years for the exemption to occur. Also, the presence of a foreign student for a part of the year will be treated as a full tax year for exemption purposes. For example, if a foreign student enters the US on 1st December 2020, the year 2020 will be considered as the first year for a 5 year exemption.

However, a foreign student may continue to avail exemption from the Substantial Attendance Test even after 5 calendar years, if the following conditions are met:

• Establishes that he/she does not intend to reside in the United States permanently.

• He has adequately complied with his visa requirements.

The facts and circumstances to be considered to determine whether he has demonstrated an intention to permanently reside in the United States including, but not limited to, the following:

• Has he maintained close relations with any foreign country.

• Whether he has taken positive steps to change his status from non-immigrant to lawful permanent resident.

tax implications

There is no minimum dollar amount of income that triggers a filing requirement for a non-resident alien in the US, including a foreign student or a foreign scholar. Typically, students earn the following types of income while studying in the US:

(1) Scholarship/Fellowship grant, covering tuition, fees, books, room/board, and/or travel.

(2) compensation for services rendered, usually as a part-time employee while attending school or as a graduate teaching or research assistant; And

(3) Income from savings, such as interest from a US bank account, etc.

The US only taxes non-resident aliens on their income, effectively known as a US business or ECI (effectively connected income—ECI income is defined as income from the operation of a US business). and is directly linked at their US-sourced, determinable, annual or periodic (FDAP) income (interest and dividends) that is not effectively linked to the US business or business. ECI is taxed at the normal graduate tax rates applicable to US citizens, while FDAP income is typically taxed at a similar rate of 30%.

Receipt of Fellowship Grant

Receipt of fellowship/scholarship grant is treated as income effectively connected with the conduct of business or business in the US and may be taxable at the normal graduate tax rates applicable to US citizens.

While it is generally expected that taxable scholarships and fellowship grants will not be deemed to be associated with a U.S. business or profession, and will therefore be taxed at a flat rate of 30%, assuming they constitute FDP income , although it is not so.

It is important to note that whether payments a foreign student receives as a scholarship or fellowship grant will be taxable will depend on whether the grant is US-sourced or foreign-sourced income (assuming that there are no exclusions). may not apply).

In order to determine whether a grant received by a student is foreign-sourced or US-sourced income, the IRS concludes that such grants are considered to be sources where the principal economic relationship exists, that is, the residence of the grantee’s payer. Therefore, scholarships and fellowship grants are linked to the grantee’s residence or institution, not the place where the student is studying, which was the criterion for receiving grants prior to 1989. Therefore, the grant is treated as income from foreign source. Not taxable in the US. If the scholarship or fellowship grant is determined to be US-sourced and does not qualify for any exclusions, it becomes taxable in the US.

compensation for services

If a foreign student receives compensation for services provided and that compensation is US-sourced income because the services were performed in the US, the non-resident foreigner is considered to be engaged in a US business or business and is US-sourced. Income constitutes ECI. If the non-resident foreigner has other compensation income that is foreign sourced because the services generating that income were performed outside the US, the performance of those services does not give rise to a US business or business and the foreign source is compensation income (ECI). No and will not be taxed in the US. However, ECI is taxed at the same graduation rates that apply to compensation income earned by US citizens.

capital gains tax exemption

The source of profit or loss from the sale or exchange of personal property shall be in the United States if the non-resident alien has a tax home in the United States. Specifically, a foreign student shall establish a tax home in the US if he is employed in the US under any applicable nonimmigrant status and is a recipient of a US Source scholarship or fellowship. If the foreign student does not have a tax home in the US, the foreigner’s capital gains will be considered a foreign source and will not be taxable in the US. In addition, the foreign student will not be taxable on his US source capital gains income in any calendar year in which his presence in the US is not equal to or longer than 183 days.

Student FICA Tax Exemption

Taxes under the Federal Contribution Insurance Act (‘FICA’) are made up of old age, survivor, and disability insurance taxes, also known as Social Security taxes, and hospital insurance taxes, also known as Medicare taxes. The Internal Revenue Code imposes liability for Social Security and Medicare taxes on both employers and employees who earn income from wages in the US. The student or scholar will be exempt from Social Security and Medicare taxes on wages paid for services performed in the US, as long as the foreign student complies with his or her visa requirement.

Exempt employment includes 20 hours a week (40 hours during the summer holidays), off-campus student employment permitted by the United States Citizenship and Immigration Services, practical training student employment on or off campus, and employment as a summer camp worker . .

However, if a foreign student has become a resident alien, the student may be exempt from Social Security and Medicare taxes under the “Student FICA Exemption.” FICA taxes do not apply to service performed by students employed by a school or college. Or the university where the student is pursuing the course of study. Anyone who is a half-time undergraduate, graduate, or professional student will qualify for a FICA exemption.

Finally, students moving to the US for higher education should understand and assess their tax residency status and any tax obligations. Best to be fully compliant under US tax laws and avoid any adverse effects.

Vikas Vasal is the National Leader-Tax at Grant Thornton India LLP.

Lloyd Pinto and Nikita Gulati contributed to the article.