OVERVIEW OF U.S. TAXATION OF J-1 AND H-1B PROFESSORS/RESEARCHERS NOTE: This material is designed to give information that applies to the majority of scholars. Throughout this document, the term scholar will refer to professors, researchers, and short-term scholars working temporarily at U.S. colleges or universities on a J-1 or H-1B visa. It is important to read Internal Revenue Service (IRS) Publication 519 for dull details. Other helpful publications include the instructions for Forms 1040 and 1040NR, Publication 901 on Tax Treaties, and other schedules and forms pertaining to special situations. Scholars may be subject to U.S. taxation based on the source and type of income and the number of years they have been present in the U.S. Tax treaties with over 40 countries may alter tax liability. Other forms of taxation include state income tax, state and local sales tax, and social security/medicare. Under the U.S. system, it is the individual’s responsibility to determine tax liability and file the appropriate forms in a timely manner. Effective with the 1992 tax year, all those in F, J, and M status who are non-residents for tax purposes (including dependents) must file Form 1040NR and an accompanying tax statement even if they have no U.S. source income. See IRS Publication 519 for details. The legal basis for this requirement is being questioned and there may be changes in future tax years. IRS Publication 519 and 1040NR instructions should be consulted each year. HOW TO DETERMINE TAX STATUS A key factor in determining an individual’s income tax liability is his or her status as a resident alien or non-resident alien for tax purposes. This status may or may not coincide with their resident or non-resident status with the Immigration and Naturalization Service. Many individuals who are in a non-immigrant status are considered resident aliens for tax purposes. Throughout this document, reference to resident or non-resident aliens means for tax purposes only. Generally, teachers, researchers, and trainees who are in the U.S. in J-1 status for fewer than two calendar years, including partial years, are exempt from counting days of presence and are considered non-resident aliens for tax purposes. A scholar who was in the U.S. for over two calendar years during the previous six years on a J visa must start counting days of presence and is a resident alien for tax purposes, provided the substantial presence test is met. (However, if all income for services performed in the U.S. is from a foreign source, the person is considered a non-resident alien for four years.) H-1B scholars are not exempt from counting days and must start counting from the date of arrival. SUBTANTIAL PRESENCE TEST Once a person is not exempt from counting days of presence, the substantial presence test is used to determine resident vs. non-resident status. The individual must have been in the U.S. for at least 31 days in the current calendar year, AND have been present in the U.S. for 183 days in the current and two preceding calendar years as follows (the days that one was exempt from counting while in J-1 status should not be included): All days from current year + 1/3 of days from last year + 1/6 of days from two years ago. If the total is 183 days or more, the individual may file as a resident alien. See “RA vs. NRA” for additional information. WHAT IS TAXED (Note – this is not a comprehensive list. Ser IRS Publication 519 for full details). Non-Residents Aliens Only U.S. source income, based on the residence of the payor. Dividend income from domestic corporations. Note: interest paid by banks, savings and loans and credit unions is NOT taxed. Wages and any other compensation for services performed in the U.S. The location of the services determines taxability, so it is possible that wages from a foreign source could be taxed if the services are performed in the U.S. Rental income from property in the U.S. Royalties from patents, copyrights, etc. Profit from the sale of property in the U.S. (some exceptions for personal property). Resident Aliens Worldwide income, same as U.S. citizens. See IRS Publication 1040 instructions. TREATY BENEFITS The U.S. has tax treaties with several countries which permit taxation at a reduced rate or exempt certain income altogether. IRS Publication 901 gives a brief summary of the provisions of each treaty. For complete details, the full treaty should be consulted. Tax treaty benefits override the U.S. tax code. Non-Resident Aliens Teachers and researchers who are employed in the U.S. and are fully or partially exempt by treaty from U.S. taxation must file Form 8233 plus the appropriate statement with the employer to claim exemption from withholding each year. Scholars who receive a service-free scholarship or fellowship must file Form W- 8BEN, which is valid for three years. Resident Aliens Individuals who would otherwise be considered resident aliens also may benefit from some provisions of the treaties and should consult Publication 901 and/or the treaty itself. HOW IS INCOME TAXED Non-Resident Aliens Income that is effectively connected with trade or business in the U.S. is taxed at the graduated rates that apply to U.S. citizens. Income that is not effectively connected is taxed at a flat 30% or lower treaty rate. Some income may be exempt by virtue of tax treaties. Anyone who is the U.S. in F, J, or M status is considered to be engaged in trade or business. Therefore, all income earned by J-1 scholars is considered to be effectively connected. All income from U.S. sources is treated as effectively connected, even if there is no connection between the business and the income. All payments for personal services (with some minor exceptions) are considered effectively connected. This includes salary, wages, commissions, fees, per diem allowances, bonuses, services, or property. However, payment to a non-resident alien by a foreign employer is not included in gross income (see “What is Taxed section). Resident Aliens Income is taxed at graduated rate, same as U.S. citizens. SCHOLARSHIPS AND FELLOWSHIPS Some J-1 scholars may be supported by a scholarship or fellowship provided to them expressly for the purpose of pursuing their J-1 program. This does not refer to grants to an institution from which a scholar may be paid, such as National Institutes of Health grants for research. All scholarships and fellowships, including payments to third parties on behalf of the grantee, are subject to U.S. taxation unless: 1. The income comes from a foreign source, or 2. It is excluded by the U.S. tax code, or 3. It is excluded by treaty. Foreign source income is defined by the residence of the payor. A foreign-source grant is not subject to U.S. taxation even if a U.S. agent distributes the funds on behalf of the foreign payor. Unlike students, professors and research scholars are not eligible for the “qualified educational expense” exclusion since they are not considered to be degree-seeking candidates. Scholars who are recipients of a scholarship or fellowship are withheld at a flat 14% rate, unless they can benefit from a tax treaty or claim business-related deductions. Payment for services rendered is taxed at the standard graduated rates. Grantees who are eligible for either full or partial treaty exemption must file Form 8233 annually if the income is for services rendered, of Form W-8BEN if the scholarship is service-free. WITHHOLDING Employers are required to deduct a certain amount from each employee’s paycheck to cover the individual’s estimated tax liability. They must withhold an amount equal to 90% of the current Year’s estimated tax or 100% of the prior year’s liability, whichever is lower. Withholding is not automatic. Employees must fill in Form W-4 and submit it to the employer to declare their tax status (resident or non-resident) and to instruct the payroll office how much to withhold. Extreme caution should be exercised in filling out the form, as errors could result in having to pay back taxes, fines, or penalties. Non-Resident Aliens The Form W-4 was not prepared with non-resident aliens in mind. The worksheet and instructions should not be used by these individuals; competent assistance should be sought. Generally, non-resident aliens must check “single” or “married filing separately” as their filing status and may claim only one withholding allowance. Even if their family members are residing with then in the U.S. and are wholly dependent upon them, no additional withholding allowances may be taken for dependents. Nationals of Canada, Japan, Korea, Mexico, India, and American Samoa enjoy some exceptions from this rule. On line 6 of the Form W-4, the employer should be instructed to withhold an additional mount per week. The amount changes each year and can be found in Publication 519. This compensates for the standard deduction built into the tax withholding tables for which non-resident aliens are not eligible. Non-wage income should be withheld at a flat 30%. Individuals from treaty countries who wish to claim partial or total exemption from withholding must file additional forms with the employer. Form 8233 must be filed annually to claim treaty exemption from income derived from services performed for the employer. Form W-8BEN must be filed to claim treaty exemption from service-free scholarship or fellowship income, and is valid for up to three years. Those who have income from which no tax is withheld may need to file Form 1040- ES(NR) and make regular estimated tax payments. This must be done if the amount withheld is less than either 90% of the tax for the current year or 100% of the prior year. Resident Aliens Resident aliens should follow the instructions and worksheet on the W-4. HOW AND WHEN TO FILE AN INCOME TAX RETURN Non-Resident Aliens All non-resident aliens for tax purposes must file Form 1040NR each year, along with a special statement detailed in IRS Publication 519, even if they have no U.S. income or if all income is excludable. If part or all of the income is excludable by virtue of a treaty, an additional statement, also detailed in IRS Publication 519, must be filed. Those who have wages subject to U.S. withholding must file by 15 April each year. Those with no wages subject to U.S. withholding must file by 15 June. The address is: Internal Revenue Service Center Philadelphia, PA 19255 Resident Aliens Resident aliens must file either Form 1040EZ, 1040A, or 1040 at the address shown on the instructions for that form. It must be filed by 15 April each year. Extensions may be possible under certain circumstances. WHAT INCOME CAN BE EXCLUDED Non-Resident Aliens Foreign source income, including grants from international organizations Compensation from foreign employers (this does NOT apply to employees of foreign governments, unless that government gives the same exclusion to U.S. government employees working in that country) Some annuity income Income excluded by treaty. See IRS Publication 901 Resident Aliens Income excluded by treaty DEDUCTIONS/ITEMIZED DEDUCTIONS Non-Resident Aliens Non-resident aliens may only claim deductions that are effectively connected with their U.S. trade or business. The standard deduction cannot be claimed. Itemized deductions that may generally be claimed are state and local taxes, charitable contributions, casualty and theft losses, and possibly some moving, travel, or miscellaneous job expenses. Some non-resident aliens may claim deductions for educational or away from home expenses. Resident Aliens Resident aliens are eligible for the standard deduction and all itemized deductions for which U.S. citizens are eligible. TAX PAYMENTS AND CREDITS Non-Resident Aliens Most non-residents are not eligible for tax credits except for the amount of federal tax that was withheld from wages. Under limited circumstances they may be eligible for childcare credit, foreign tax credit, or earned income credit. Resident Aliens Resident aliens are eligible for the same credit as U.S. citizens. SOCIAL SECURITY AND MEDICARE Non-Resident Aliens During the first two calendar years in the U.S., J-1 scholars are not required to pay social security and medicare (FICA) taxes if the services performed are to carry out the purpose for which they were admitted. This includes work that is considered to be a part of the J-1’s program and any other employment that is explicitly authorized by the Exchange Visitor Program’s Responsible Officer (or Alternate Responsible Officer). H-1B scholars must be FICA. Resident Aliens J-1 scholars who have been in the U.S. long enough to be considered resident aliens for tax purposes must pay social security and medicare taxes. J-2 dependents that have obtained work authorization from the INS and are working must have these taxes withheld. STATE TAXES Many states have a state income tax and U.S. source income of J-1 scholars may be subject to state taxation. It varies by state, and the state tax authority should b consulted. Both resident and non-resident aliens may deduct state income taxes from their federal tax liability. Most states also have state and local sales taxes, which are added to the cost of purchases when they are made. These taxes are not deductible from federal taxes. ADDITIONAL ASSISTANCE This brief summary of very complex tax regulations is for general informational purposes only. Scholars should read IRS publications 519, 901, and the instructions to the appropriate Form 1040NR, 1040, 1040A, or 1040EZ. The International Officer of Payroll Office may be able to offer some assistance, though in most instances there is not a tax expert on staff and only general assistance may be available. The IRS may be able to answer some questions and can be reached at the toll free number 1-800-829-1040. For complex situations, it would be advisable to consult a tax attorney, a Certified Public Accountant, of other reputable tax adviser.
Pages to are hidden for
"GENERAL TAX INFORMATION"Please download to view full document