U.S. Tax Solutions for resident alien and nonresident alien foreign nationals

Frequently Asked Questions by Foreign Nationals

Is my residency status for tax purposes the same as my immigration status?
If I am a permanent resident of the U.S. am I always a resident for tax purposes?
I entered the United States as an F-1 student for the first time in December of 2002. It is now 2007. Am I a resident or nonresident alien?
I am visiting the United States on an H-1b visa, and my spouse is visiting on an H-4 visa. What is my residency status for tax purposes?
I am an F-1 visa holder and my spouse is an F-2 visa holder. We both worked for wages last year and our employers withheld social security and Medicare tax. Can we claim refunds and how?
I am a foreign national in the United States to obtain an MBA degree. Is the cost of my education deductible?
My wife and I live in Canada as Canadian landed immigrants. I commute daily to work in the United States on an H1b visa while my wife stays at home. Her only income is interest and dividends from our Canadian money market account. Can I use U.S./Canada treaty Article XXV to reduce my U.S. Tax liability?
I am a resident of China. I entered the U.S. originally on an F-2 visa. I then traveled to Mexico and changed my visa to F-1 after I got admitted to graduate school. This August I got a research assistantship at my university to work for 20 hours a week. I think I should be eligible for the $5,000 tax exemption based on Article 20 of the U.S./China treaty, but my payroll department said in order to be qualified for the exemption, I must have entered the U.S. on an F-1 visa the first time. Is that correct?
I am a post doc student and a citizen of Russia, performing research in the U.S. on a J-1 visa. Am I eligible for full exemption of tax under U.S./Russian tax treaty Article 18?
I am teaching and doing research at a university in California, visiting the U.S. on an H1-b visa from my home country. I can claim an exemption from federal income tax under my country's tax treaty with the U.S. However, the university is withholding social security and Medicare tax on my exempt income, in addition to state income tax. Will I get a refund of this withholding when I file my tax return?

Is it true that an individual on an H1b visa performing services in the U.S. can claim deductions for lodging, meals and travel if the service lasts less than 1 year. If so, then does the person have to work for a non-U.S. company or it does it matter? Also, what if the person performs services here for less than one year and changes to a student visa? Can the deductions for the time on the H1 visa be claimed?

Question: Is my residency status for tax purposes the same as my immigration status?

Answer: Your residency status for tax purposes is completely separate from your designation for immigration purposes. You might qualify as a resident for tax purposes while remaining a nonimmigrant alien for immigration purposes. If you are present in the U.S. on a temporary visa, you might be a resident alien for tax purposes, a non-resident alien, a non-resident alien who is eligible to elect to be taxed as a resident, or a dual-status alien. Ref: Your Residency Status.

Question: If I am a permanent resident of the U.S. am I always a resident for tax purposes?

Answer: You are a lawful permanent resident if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the Immigration and Naturalization Service (INS) has issued you an alien registration card, also known as a green card (although it is pink). You are a U.S. resident for tax purposes beginning on the first day you are present in the U.S. as a lawful permanent resident. Therefore, for the first year of your residency, if you were a nonresident prior to obtaining permanent residency status, you will be classified as a dual-status alien for tax purposes. As a dual-status alien you must file a separate return, cannot claim the standard deduction, and generally cannot claim dependency exemptions.

As a resident taxpayer you must report, for U.S. tax purposes, your worldwide income. You are also eligible to claim all deductions and credits available to U.S. citizens once you are a full-year resident. You can file Form 1040, 1040A or 1040EZ, whichever is applicable to your situation, and if you are married you can file a joint return with your spouse. See the instructions for the forms. As a resident taxpayer, you still might be eligible to claim treaty benefits under the U.S. tax treaty with your home country. Ref: Your Residency Status.

Question: I entered the United States as an F-1 student for the first time in December of 2002. It is now 2007. Am I a resident or nonresident alien?

Answer: As an F-1 student (or family member), you were exempt from the substantial presence test for determining U.S. tax residency for the first five calendar years you were present in the United States. A calendar year is counted for any part of a calendar year you were present in the United States. That means you were considered a nonresident alien during that period because you were an "exempt individual." Because 2007 is your sixth calendar year in the United States, that period has ended, so you must use the substantial presence test to determine your tax residency status. You will be considered a U.S. resident during the current calendar year for tax purposes if you meet the substantial presence test.

To meet this test, you must be physically present in the United States during a period you do not hold an A, G, F, J, M or Q visa on at least:

1. 31 days during the current year, and

2. 183 days during the 3-year period that includes the current year and the previous two years, counting:

All the days you were present in the current year, and

1/3 of the days you were present in the first preceding year, and

1/6 of the days you were present in the second preceding year.

This test is easy if the current year is the first calendar year you are not considered an exempt individual. If that's the case, you meet the test if you were present in the U.S. for at least 183 days during the year. If you were present in the U.S. for less than 183 days in the current year, you do not meet the test. Ref: Your Residency Status.

Question: I am visiting the United States on an H-1b visa, and my spouse is visiting on an H-4 visa. What is my residency status for tax purposes?

Answer: You are not exempt from the substantial presence test unless you are present in the United States on an F, J, M or Q visa. Therefore, you are a U.S. resident in the current year for tax purposes if you meet the substantial presence test (see the previous question), beginning on the first day you are present in the United States. You are not considered present in the United States while you are here on an F, J, M or Q visa.

If you meet the test and have been in the U.S. on an H-1B visa for the entire calendar year, you are a full-year resident for U.S. tax purposes. As a resident taxpayer you must report, for U.S. tax purposes, your worldwide income. You are also eligible to claim all deductions and credits available to U.S. citizens. (However, to claim the Earned Income Credit, you and all members of your family must have Social Security numbers enabling you to work.) You can file Form 1040, 1040A or 1040EZ, whichever is applicable to your situation, and if you are married you can file a joint return with your spouse. See the instructions for the forms. As a resident taxpayer, you still might be eligible to claim treaty benefits under the U.S. tax treaty with your home country.

If you fail the substantial presence test you are a nonresident alien unless you qualify for and make a special election (see below). As a nonresident alien, you are required to file a tax return each year you are here if you have any income subject to U.S. income tax. If you are married, you and your spouse must file separate returns; joint returns are not allowed. File Form 1040NR, U.S. Nonresident Alien Income Tax Return, or, if you qualify, Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents.

If you received wages subject to U.S. tax withholding during the year, the due date for your tax return is April 15 of the following year. If you did not receive taxable wages during the year, the due date for your tax return is June 15 of the following year. Your Form 1040NR or Form 1040NR-EZ must be sent to the Internal Revenue Service Center, Philadelphia, PA 19255. Ref: Your Residency Status.

Special Elections: There is a special election [IRC Sec. 7701(b)(4)] to be treated as a resident alien from your arrival date if you satisfy the following tests -

* You are not otherwise a resident alien for the year,

* You were not a resident alien at any time in the immediately preceding year,

* You are a resident alien under the substantial presence test for the immediately following year,

* You are present in the United States during the election year for a period of 31 consecutive days,

* Your days of U.S. presence are 75% or more of the total days between the beginning of the earliest 31 day consecutive U.S. day period and December 31.

If you make the election, you will be a dual-status alien and you can claim an exemption for your spouse, which is a deduction of $3,000 for 2002. Furthermore, the regulations include an extremely liberal rule that permits an alien who makes the election to make an election as well on behalf of dependent children who themselves satisfy the tests [Reg. Sec. 301.7701(b)-4(c)(3)(v)]. You must, however, have an ITIN for your spouse and children to claim them. Also, to make the election, you must pass the substantial presence test in 2003, which means we will have to file an automatic extension for the time to file your return. The regulations require you to pay tax by the original due date of the return as if you were a non-resident alien. As a dual-status alien, you cannot file a joint return with your spouse, so the tax rates are those for a married taxpayer filing a separate return. Additionally, you are not subject to U.S. tax on any non-U.S. source income earned prior to your arrival in the U.S.

Alternatively, a further election is available, when combined with the first election, to file a joint resident return with your spouse and be treated as a U.S. resident for the entire year [IRC Sec. 6013(g)]. Under this election, you can claim the standard deduction and other tax benefits available to U.S. citizens and residents, but you are subject to tax on your worldwide income for the entire calendar year. In order to eliminate double taxation, the foreign tax credit is generally available to claim against foreign taxes paid on foreign source income.

Question: I am an F-1 visa holder and my spouse is an F-2 visa holder. We both worked for wages last year and our employers withheld social security and Medicare tax. Can we claim refunds and how?

Answer: Under IRC Sec. 3121(b)(19), services performed by a nonresident alien visiting the U.S. on an F, J, M or Q visa, which are carried out for the purpose of the visa, are not subject to social security or Medicare tax. Note that you must be a non-resident alien. Once you have passed the substantial presence test you no longer qualify for the exemption. Also, family members on "-2" visas do not qualify for the exemption.

On-campus employment qualifies for this exemption. Off-campus employment that is permitted for a student, and is so noted on the student's copy of Immigration Form I-94, "Arrival-Departure Record," is also exempt. Off-campus work performed by students due to severe economic necessity or for optional practical training, as noted on INS Form I-688B or Form I-766 is also exempt. If you qualify for this exemption, you should contact your employer and tell them that you are exempt from social security and Medicare tax under IRC sec. 3121(b)(19), and ask for a refund. If the employer will not grant a refund we can apply for one from the IRS. Form 843 is used for this purpose and must be filled out correctly to successfully claim a refund. Ref: Social Security Tax.

Question: I am a foreign national in the United States to obtain an MBA degree. Is the cost of my education deductible?

Answer: First, if you are a nonresident alien, the education credits and the special $3,000 education deduction available to residents are not available to you. However, the costs of obtaining an MBA (or other advanced degree) are deductible as miscellaneous itemized deductions (subject to the 2%-of-AGI floor) if the MBA either 1) maintains or improves skills needed in your present work, as long as you have established a profession, or 2) meets the express requirements of your employer, but is not required to obtain employment. Not only is the tuition deductible, but also books and supplies. The IRS is aggressive in questioning this deduction, and the courts will deny the deduction if you cannot demonstrate an established profession. If the IRS questions the deduction, it usually asks for a letter from your employer stating the education is required, even though that is not a necessary condition. In one case, the taxpayer began employment as a market research analyst after graduation from college. He worked at this for the summer, but in the fall returned to school for his MBA. He was not allowed to deduct the cost of his MBA, since he had not established himself in a trade or business. Ross Lawrence Link (1988) 90 TC 460, aff'd by unpublished order (CA6, 2-1-89).

Question: My wife and I live in Canada as Canadian landed immigrants. I commute daily to work in the United States on an H1b visa while my wife stays at home. Her only income is interest and dividends from our Canadian money market account. Can I use U.S./Canada treaty Article XXV to reduce my U.S. Tax liability?

Answer: It appears that you are a prime candidate for Canadian treaty Article XXV. Your days commuting to the U.S. are not counted toward the substantial presence test, so you remain a nonresident for tax purposes and must use Form 1040NR to report your U.S. source income. Article XXV essentially allows you to claim the benefits of filing a joint resident return, through a special formula, on Form 1040NR.

Question: I am a resident of China. I entered the U.S. originally on an F-2 visa. I then traveled to Mexico and changed my visa to F-1 after I got admitted to graduate school. This August I got a research assistantship at my university to work for 20 hours a week. I think I should be eligible for the $5,000 tax exemption based on Article 20 of the U.S./China treaty, but my payroll department said in order to be qualified for the exemption, I must have entered the U.S. on an F-1 visa the first time. Is that correct?

Answer: This is a question that often comes up with respect to various treaties. According to the U.S./China treaty, you must come to the United States as a resident of China, for the primary purpose of being a student, not to simply accompany a primary visa holder. Unofficially, the IRS allows you to change your status within about 60 days of arrival to qualify for the exemption. If your change took place later than that your payroll department will probably not cooperate in granting the exemption. You can always claim the exemption on your tax return, even if payroll does not allow it, but there is the danger that the IRS will also disallow it. This might occur up to three years after you file your return, even if you have been granted a refund initially.

Question: I am a post doc student and a citizen of Russia, performing research in the U.S. on a J-1 visa. Am I eligible for full exemption of tax under U.S./Russian tax treaty Article 18?

Answer: You are eligible for exemption under Russian treaty Article 18 if you are in the U.S. for studying, training or doing research as the recipient of a non-service grant or "other similar payment." An "other similar payment," according to the IRS, must have the same characteristics as a grant or allowance, namely not require services to be performed as a condition of receiving the payment. Therefore, this article does not provide an exemption for compensation received for services performed. Many Russians have claimed this treaty exemption who were not eligible for it, but received refunds simply because the IRS has not had adequate resources to audit these returns. However, I believe the IRS has now become very aware of the problem. The IRS can audit your return and impose interest and penalties on adjustments for up to 3 years after the due date or filing date, whichever is later.

Question: I am teaching and doing research at a university in California, visiting the U.S. on an H1-b visa from my home country. I can claim an exemption from federal income tax under my country's tax treaty with the U.S. However, the university is withholding social security and Medicare tax on my exempt income, in addition to state income tax. Will I get a refund of this withholding when I file my tax return?

Answer: Treaty exemptions generally apply only to federal income tax. As an H1-b visa holder, you are required to pay social security and Medicare tax on the income that is not taxable for federal income tax purposes. Only F, J, M and Q visa holders are exempt from social security tax. Regarding state income tax, most states honor federal treaty exemptions, but they are not required to by federal law, and some do not. Those that do not (that I am aware of) are: 1) Alabama, 2) Arkansas, 3) California, 4) Connecticut, 5) Hawaii, 6) Kansas, 7) Kentucky, 8) Louisiana, 9) Maryland, 10) Mississippi, 11) New Jersey, 12) North Dakota, and 13) Pennsylvania. If you live or work in one of these states, you will owe state income tax even though your income is exempt from federal income tax by a treaty.

Question: Is it true that an individual on an H1b visa performing services in the U.S. can claim deductions for lodging, meals and travel if the service lasts less than 1 year. If so, then does the person have to work for a non-U.S. company or it does it matter? Also, what if the person performs services here for less than one year and changes to a student visa? Can the deductions for the time on the H1 visa be claimed?

Answer: "Away from home" deductions for meals, lodging and travel can generally be claimed only if you have a regular job somewhere else, and are on temporary assignment for work or training. Sec. 162(a) of the Code specifies that a taxpayer will not be treated as temporarily away from home if the period lasts longer than one year. Several IRS rulings and court cases have held that a non-resident alien working in the U.S. is eligible for away from home deductions, as long as the assignment does not exceed one year, and the alien has continuing employment in his or her home country. (See Rev. Rul. 73-578, 1973-2 CB 39, clarified by Rev. Rul. 83-82, 1983-1 CB 45 and updated by Rev. Rul. 93-86, 1993-2 CB 71. See also Guidnard v U.S. (1978, DC OH) 42 AFTR2d 78-5808.) It does not matter whether the U.S. work is paid by a U.S. or foreign employer, as long as permanent employment is retained in the home country. Changing to a student visa and remaining in the U.S. after the period of employment would disqualify the deductions.

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Next to being shot at and missed, nothing is quite as satisfying as an income tax refund.
— F. J. Raymond
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