U.S. taxation of nonimmigrant students, teachers and trainees.

• Author: Kenny, William J.

U.S. colleges, universities, vocational, high and language schools, and many U.S. corporations, sponsor educational programs that draw hundreds of thousands of foreign nationals to the U.S. each year to study, teach or perform research. These individuals face multiple tax filing obligations, including a tax return(1) and a supplemental annual statement.(2) Many may have little experience with voluntary self-assessment tax systems and limited English language proficiency. Because tax professionals generally have little experience with nonresident alien (NRA) tax matters, help is often difficult to find. This article discusses the U.S. compliance requirements of international, nonimmigrant, students, teachers and trainees.

Classifying Foreign Nationals

Foreign nationals who come to the U.S. are divided into two broad categories - immigrants and nonimmigrants - by the Immigration and Nationality Act,(3) which is administered by the Immigration and Naturalization Service (INS). Those who come to study, teach, engage in research or receive training and intend to return to their home country are nonimmigrants; they are granted visas of the following types: * "F": For an alien who is a bona fide student qualified to pursue a full course of study and who seeks to enter the U.S. temporarily and solely for the purpose of pursuing such a course of study at an established institution of learning, and his spouse and minor children.(4) * "J": For an alien who is a bona fide student, scholar, trainee, teacher, professor, research assistant, specialist or leader in a field of specialized knowledge or skill, or other person of similar description, who is coming temporarily to the U.S. to participate in a program for the purpose of teaching, instructing or lecturing, studying, observing, conducting research, consulting, demonstrating special skills, or receiving training, and his spouse and minor children.(5) * "M": For an alien with a residence in a foreign country which he has no intention of abandoning, who seeks to enter the U.S. temporarily and solely for the purpose of pursuing a full course of study at an established vocational or other recognized nonacademic institution (other than in a language training program), and his spouse and minor children.(6)

Resident and Nonresident Taxation

Under Regs. Sec. 1.1-1(a), individuals who are not U.S. citizens are aliens for Federal tax purposes. The taxation of an alien depends on whether he is a U.S. resident. Regs. Sec. 1.871-1 provides that resident aliens (RAs)) are taxed like U.S. citizens; thus, they are taxed on their worldwide income and allowed the same exclusions and deductions, personal exemption and choice of filing status as are U.S. citizens (dependency exemptions are permitted if the dependent meets a special residence test under Sec. 152(b)(3)). RAs may file Form 1040, 1040A or 1040ES.

In contrast, Sec. 871 provides that NRAs are taxed only on U.S.-source income. Under Sec. 871(b), such income that is "effectively connected" with a U.S. trade or business may be reduced by limited itemized deductions (Sec. 63(c)(6)(B) bars use of the standard deduction) and a personal exemption. Under Regs. Sec. 1.1-1(a)(2)(ii), such income generally is subject to tax at either the single or married filing separately rates. Sec. 871(a) provides that income not effectively connected with a U.S. trade or business (e.g., investment income and income from the sale of certain assets) is subject to a flat 30% tax rate. The benefits of tax treaties are available to NRAS, but not to RAs. NRAs file Form 1040NR, U.S. Nonresident Alien Income Tax Return.

Determining Resident Status

* Green card test

Aliens are U.S. residents if they meet a "green card" test or "substantial presence" test. Sec. 7701(b)(1)(i) provides that an individual granted the right to remain permanently in the U.S. is a lawful permanent resident(7); this right is granted by the INS through the issuance of a "green card." Lawful permanent residents are immigrants. Holders of F, J or M visas are, by definition, nonimmigrants and, therefore, cannot meet the green card test.

* Substantial presence test

The two-part substantial presence test of Sec. 7701(b)(3) counts the days the alien is physically present in the U.S. The alien must be present in the U.S. for at least 31 days in the current year, and for at least 183 days in the consecutive three-year period ending with the current year. The 183-day test counts all days of presence in the current year, one-third of the days in the immediately preceding year and one-sixth of the days in the second preceding year.

Example 1: A, an alien, was present in the U.S. for 122 days in each of 1995, 1994 and 1993. A counts 122 days in 1995, 40 2/3, (122 x 1/3) in 1994 and 20 1/3 (122 x 1/6) for 1993, for a total of 183. Therefore, A meets the substantial presence test and is an RA.

Example 2: B, an alien, was present in the U.S. for 28 days in 1995 and 365 days for each of 1994 and 1993. B is an NRA because, although she meets the 183-day part of the test, she was not present for 31 days in the current year.

Example 3: C, an alien, was present in the U.S. for 170 days in 1995, and 30 days in each of 1994 and 1993. C counts 170 days in 1995, 10 (30 x 1/3) days in 1994 and 5 (30 x 1/6) days in 1993, for a total of 185 days. Thus, C is an RA.

Special rules apply when calculating days under the substantial presence test. * Partial days: Regs. Sec. 301.7701(b)-1(c)(2)(i) provides that there are no fractional days. If an alien is...