The F-1 Visa – Privileged U.S. Tax Status And How To Keep It

Published: 06/29/2018

Source: http://bit.ly/2tEa3An

Foreign students leaving their home country and arriving in the U.S. for higher education may come across many things that seem alien to them – like the accent, culture, (inexplicably large) food portions, etc. But one area where they are treated as the aliens is under U.S. Federal income tax law. Foreign students who arrive in the U.S. on an F-1 visa (i.e., student visa) are treated as nonresident aliens and subject to special tax provisions. This article discusses the residency status of foreign students on an F-1 visa, Federal income tax consequences, and U.S. reporting requirements.

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FOREIGN STUDENTS ARE PER-SE NONRESIDENT ALIENS IN THE U.S.
An individual is treated as a U.S. resident if he or she meets either the "Green Card Test" or "Substantial Presence Test."1

Green Card Test
An individual who holds a permanent resident card (more commonly known as a Green Card) is treated as a U.S. resident for Federal income tax purposes. 2

Substantial Presence Test
An individual who is neither a U.S. citizen nor a Green Card holder is treated as a U.S. resident if he or she satisfies the Substantial Presence Test. The Substantial Presence Test is satisfied for a relevant year if the following conditions are met:3

The individual is present for at least 31 days in the relevant year.
The number of days of presence in the U.S. in the relevant year and the two preceding years equals or exceeds a weighted aggregate of 183 days.
For purposes of the weighted calculation, each day in the relevant year counts as one day, each day in the first preceding year counts as 1/3 of a day, and each day in the second preceding year counts as 1/6 of a day. An individual will be considered a resident alien under this test if he or she is present in the U.S. for 183 days or more in the relevant year. An individual who meets these requirements is treated as a U.S. resident and is therefore subject to U.S. Federal income tax on his or her worldwide income.

Foreign Students Are Exempt from the Substantial Presence Test
A foreign student's days of presence in the U.S. are not counted towards the Substantial Presence Test if the student qualifies as an exempt individual.4 A foreign student will be treated as an exempt individual if the following conditions are satisfied:

The foreign student is temporarily present in the U.S. under an F-1 visa.
The foreign student substantially complies with the visa requirements.5
A foreign student will be deemed to comply substantially with the visa requirements if the individual has not engaged in activities that are prohibited by the Immigration and Nationality Act and the regulations thereunder and could result in the loss of F-1 visa status. Further, a foreign student will not be deemed to comply substantially with the visa requirements merely by showing that his or her visa has not been revoked.6

Example 1

If an individual with an F-1 visa is found to have accepted unauthorized employment or to have maintained a course of study that is not considered by the I.R.S. to be full-time, the individual will not be considered to comply substantially with the individual's visa requirements whether or not the individual's visa has been revoked.7

Thus, unless the student infringes his or her F-1 visa requirements, the foreign student will not establish tax residency in the U.S.

Exempt Individual Status Comes with an Expiration Date
A foreign student's exempt individual status remains in effect only for a specified period of time. He or she may exclude the days of presence in the U.S. for any part of five or fewer calendar years.8 Notably, presence for as little as one day during a calendar year is treated as one full year. Further, the five-year period relates to the person's lifetime and need not be consecutive. In other words, once the fiveyear threshold is reached, a foreign person may never again qualify as an exempt student under this rule. An exception applies under the closer connection test for students ("Closer Connection Test")9 described in the following section.

Example 2

Mr. A, an F-1 visa holder, has never been an exempt individual. He arrives in the U.S. for the first time on December 31, 2017. The year 2017 will be counted as one full year even though Mr. A was present in the U.S. for just one day in the year. He must count 2017 as his first year of exempt individual status. For the next four years, his days of U.S. presence will be not be counted towards the Substantial Presence Test. Thus, Mr. A will be treated as an exempt individual for 2017, 2018, 2019, 2020, and 2021. Effective January 1, 2022, his exempt individual status will terminate, and Mr. A must begin counting days towards the Substantial Presence Test unless he meets the requirements under the Closer Connection Test.

In addition, days of presence in the U.S. as a trainee or a teacher (under a "J" or "Q" visa) are also included in the five-year period.10

Example 3

Mr. B is a citizen and resident of country A just prior to his arrival in the U.S. He arrives in the U.S. on August 15, 2013, as a researcher on a J-1 visa. Without leaving the U.S. he changes to F-1 visa status on August 10, 2014. His of presence in the U.S. under the J-1 visa will be included in the five-calendar- year period. Since Mr. B held his J-1 visa during 2013 and 2014, his status as an exempt individual under an F-1 visa can only continue through 2015, 2016, and 2017.

Source: http://bit.ly/2tEa3An

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