Chapter 1. Language and terminology - key tax terms for international individuals

There are many key tax terms related to tax filing that international students should understand to meet their financial and tax filing obligations. 

 

 

 

Non-resident Alien

• • An alien is an individual who is not a U.S. Citizen or Resident
  • A non-resident alien (NRA) is an alien who hasn't passed the green card test or the substantial presence test
    • Will most likely file Form 1040NR or Form 1040NREZ (US Nonresident Alien Income Tax Return)
  • Non-resident aliens must select either the single or the married filing separately filing status
    • They can't use the head of household if they were a non-resident alien during any part of the year

Tax Treaties

• • The U.S. has income tax treaties with many different countries
  • Residents of these countries may be exempt from U.S. income tax withholding of specific kinds of income or might be taxed at reduced rates
  • Treaties differ among countries and are subject to continuous change over time. 

Individual Taxpayer Identification Number

• • If you are not eligible to apply for a social security number and you are filing a tax return, you may obtain an Individual Taxpayer Identification Number (ITIN)
  • An ITIN is a tax processing number issued by the Internal Revenue Service (IRS)
  • You can use your ITIN to complete your tax return

Adjusted Gross Income

• • Adjusted Gross Income (AGI) is the gross income figure minus adjustments to income
  • Gross income includes:
    • Wages, dividends, capital gains, business income, retirement distributions, and other income
  • Adjustments to income include:
    • Education expenses, loan interest, tuition and fees and any other applicable adjustments

Taxable Income

• • Your tax bill is calculated based on your taxable income
    • You can calculate your taxable income by subtracting deductions and exemptions from your Adjusted Gross Income
  • Some types of income are taxed while others are not
    • The wage that appears on Form W-2 is taxable while interest earned from certain U.S. banking institutions is not for non-resident aliens
      • The interest earned is subject to withholding tax of 30% of the interest
        • The withholding tax rate (the amount of federal income tax withheld from your paycheck) may be subject to treaty modifications in many countries, which requires the W-8BEN to alter the withholding rate
        • A NRA must then file a Form 1040NR to get any excess tax withheld refunded
    • Some scholarships and/or fellowships can be partially taxed depending if they were used to cover tuition or living expenses
    • It is important to know which part of your U.S. earnings is taxable and which part is not

 

 

 

When learning about filing tax returns, you may confront many terms that you are not familiar with. Some of them will not apply to your situation though. Let's review some of these terms related to taxes and see what you can or cannot claim as an international student!

Exemptions for Dependents:

• • A dependent tax exemption allows you to reduce your taxable income by excluding income for each dependent (a child or relative who depends on you to provide for them financially)
  • Residents of several pre-identified foreign countries might be able to claim their spouse and children as dependents, but the majority of non-resident aliens can not do so
  • Currently, only nonresident aliens who are U.S. nationals, residents of Canada, Mexico and South Korea, or residents of India who were students or business apprentices can have a qualifying dependent

Standard Deduction and Itemized Deduction

• • Non-resident aliens are NOT eligible for the Standard Deduction
  • They ARE eligible for acceptable itemized deductions listed in Schedule A of Form 1040NR

Social Security and Medicare Taxes

• • If a student is granted permission to work:
    • Social Security and Medicare taxes are NOT withheld from their pay
  • It is your responsibility to make sure your employer has correct information on your status to correctly withhold taxes from your paycheck

Tax Credits

• • Non-resident aliens are NOT eligible to claim many credits including the following education credits:
    • American Opportunity Credit and Lifetime Learning Credit
    • Earned Income Credit
    • Foreign Tax Credit
    • Child Tax Credit (except in special cases)

FAFSA

• • International students do NOT qualify for the Free Application for Federal Student Aid (FAFSA)
  • The FAFSA, along with all state grants and funding, is strictly for US Citizens and Legal Permanent Residents
  • Employment for international students is highly restricted and can never be used in meeting a financial guarantee for admission to most colleges
  • Many colleges allow international students to work on campus for a limited number of hours per week and others might grant permission for international students to work off-campus
  • Keep in mind that illegal employment is a deportable offense, so always check with your college before you make any work decision

Practice

Now that you are familiar with key terminology needed to file your tax forms, think of paying it forward and discuss those topics and others with a friend or a family member.

 

Congratulations! You can move on to Chapter 2. What is my residency status for federal income tax purposes?

To review the full module on Federal Tax for Internationals, click here.