Do Foreign Students Working in the United States Pay Tax?

Do Foreign Students Working in the United States Pay Tax?

Foreign Students Working in the United States & US Tax

Unfortunately, there is a significant amount of incorrect international tax law information online regarding the international tax rules for foreign students residing in the United States and working while on a student visa. This is primarily due to generalist tax law firms that only dip their feet in the international tax pool — but are not tax specialists. In general, there is a certain exemption for students who reside in the United State, so that they are not treated as US Persons and taxed on worldwide income — as well as being able to avoid FBAR and FATCA. This does not mean that all of their income earned in the United States is exempt, but they are treated as non-residents for the first five years of student-visa status. Likewise, certain students who are postgraduate students and are working in the United States as teachers or researchers may avoid US tax for a limited time for income generated from their work in the United States as a student, postgraduate student, or recent research/teacher transplant. Let’s review the basics of the international tax rules for foreign visa students working in the United States.

Student Visas: F, M, J, Q & US Tax

What are the most popular type of student visa is the F1 visa, there are very other types of student business as well; they are as follows:

      • F or M: Student Visa

      • J: Exchange Visitor

      • Q: Cultural Exchange

What is Exempt Student Visa Status?

In general, when a person is considered a student on one of these types of above-referenced visas — with the primary purpose of studying in the United States — they are exempt from US tax on their worldwide income.  Backtracking for a moment, the US taxes US persons on their worldwide income.  And, a visa holder may still be considered a US person if they made a substantial presence test. Nevertheless, a student that would otherwise be taxed on their worldwide income is exempt as long as they have not been a student in the United States for more than five years and/or meet the other exceptions or exclusions that may apply.

Meeting the Closer Connection Exception to SPT

In general, a person is not considered a US person, even if they made a substantial presence test — if they can show that they have a closer connection to another foreign country or countries. In general, it can be difficult for a student to meet this exception for the simple fact that they are typically in the United States and the majority of the year and therefore would meet the substantial presence test (noting that this is mainly an issue for post-5 year student status)

Special Exception for Students

As provided by the IRS:

 The second exception to the substantial presence test is set forth in IRC § 7701(b)(5)(D) and (E) and Treas. Reg. § 301.7701(b)-3(b)(7)(iii). The exception is available only to students (not teachers/researchers, etc.), and contains four requirements, all of which must be met:

      1. The student does not intend to reside permanently in the United States.

      2. The student has substantially complied with the immigration laws and requirements relating to his student nonimmigrant status.

      3. The student has not taken any steps to change their nonimmigrant status in the United States toward becoming a lawful permanent resident of the United States.

      4. The student has a closer connection to a foreign country than to the United States as evidenced by the factors listed in Treas. Reg. § 301.7701(b)-2(d)(1).

The burden is on the student to prove they met the four requirements. To claim the exception for students on an income tax return, a student should attach Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition to their Form 1040NR.

Tax Treaty

Some tax treaties allow for a person employed in the US as a researcher or Teacher and residing in the other country right before coming to the US — may still qualify for a US tax exemption on that income. As provided in the US & China Tax Treaty:

      • An individual who is, or immediately before visiting a Contracting State was, a resident of the other Contracting State and is temporarily present in the first-mentioned Contracting State for the primary purpose of teaching, giving lectures or conducting research at a university, college, school or other accredited educational institution or scientific research institution in the first mentioned Contracting State shall be exempt from tax in the first mentioned Contracting State for a period not exceeding three years in the aggregate in respect of remuneration for such teaching, lectures or research.

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