U.S. Income Taxation of Foreign Students, Teachers, and Researchers (Portfolio 6440)

Description

Bloomberg Tax Portfolio No. 6440, U.S. Income Taxation of Foreign Students, Teachers, and Researchers, 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. Resident alien students, teachers, and researchers qualify for special tax benefits not accorded to other resident aliens, and this Portfolio discusses those benefits as well.

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. For example, is the payment of a purported scholarship/fellowship grant really disguised compensation for services rendered? Or, can an individual qualify for a “teacher” exemption under an income tax treaty if, immediately before becoming a teacher, he or she was a “student” who qualified for the “student” exemption under the treaty?

Nonresident aliens are generally subject to Federal Insurance Contributions Act (FICA) tax on wages that they receive while working in the United States. All nonresident aliens, however, including students, teachers, and researchers, are eligible for the nonresident alien FICA tax exemption set forth in §3121(b)(19). In addition, nonresident alien students are eligible for the student FICA tax exemption set forth in §3121(b)(10) in the same manner and extent as U.S. citizen and resident alien students.

The tax withholding and reporting rules applicable to payments made to nonresident alien students, teachers, and researchers follow the general nonresident alien tax withholding and reporting provisions, but with special rules for the person’s student, teacher, or researcher status. For example, while the general tax withholding rules impose a 30% withholding tax on certain payments to nonresident aliens, certain nonresident alien students can qualify for a reduced 14% withholding rate on taxable scholarships or fellowship grants.

Finally, certain income tax treaties to which the United States is a party provide for variations to the general rules of the Code. These variations are noted where appropriate.

This Portfolio may be cited as Harding, 6440 T.M., U.S. Income Taxation of Foreign Students, Teachers, and Researchers.

Table of Contents

I. Introduction
II. Classification as a Nonresident Alien
III. Income Taxation of Students, Teachers, and Researchers
IV. Social Security Taxation of Nonresident Alien Students, Teachers, and Researchers
V. Income Tax Withholding on Payments Made to Nonresident Alien Students, Teachers, and Researchers