Income Taxes in America
by Gary W. Carter. Ph.D., MT, CPA
The Tax Guy
Welcome to America: the land of abundance; the land of opportunity; the land of tax deadlines! Yes, with the good comes the annoyingly inevitable. Over 200 years ago Benjamin Franklin, one of America's great statesmen, said that nothing is certain in life but death and taxes.
Today, things haven't changed much. I am told there are people working on fighting death, but no one will deny the certainty of taxes. I am here to help you over the rough spots. My tax service is dedicated to aiding international students and scholars comply with U.S. tax laws as painlessly as possible. In this space I will provide brief articles relating to tax rules that affect you. For more comprehensive information, visit my web site at www.thetaxguy.com.
You must file a tax return
Our income tax system is probably different than the tax system in your home country. Most countries do not have a tax system based on voluntary compliance as ours is. Each year, usually by April 15th, you are required to complete and mail (file) an income tax return to the Internal Revenue Service (IRS). This is because the tax that is withheld, if any, when you receive your wage or scholarship income is only an estimate of what you owe. Your actual tax liability is computed on your tax return.
When you file your return you will either have to pay additional tax to or, more likely, be able to claim a refund from the government. That's why filing your tax return is very important. Additionally, most of our state governments also impose income taxes based generally on the federal tax and subject to the same filing requirement.
Don't pass up a check from "Uncle Sam"
A few years ago a study determined that many international students either do not file a return or else they file incorrectly. However, it was also noted that this has resulted in a net gain to the U.S. Treasury, because most of the non-filers were due a refund!
It is even more important to file a return if you owe more money to the government than if the government owes you money. I mentioned that we have a voluntary tax system, but it is not really voluntary if you consider the consequences of not filing. If the IRS catches up with you, you may have to pay penalties, interest, orsuffer other potentially bad consequences.
Your return is special
It is an American tradition to complain about taxes, so feel free to do so. If you are a student present in the United States on an F or J visa, and have been here for fewer than five calendar years, you are a "nonresident alien." As it happens, you probably have more to complain about than most American taxpayers. You are required to file a special form, Form 1040NR (or the simpler Form 1040NR-EZ), if you have any income subject to U.S. tax.
This form does not include many of the deductions that resident taxpayers can claim. Take heart, however, because you might get to claim a tax treaty exemption that will reduce or eliminate your tax liability. The United States has tax treaties with over 50 countries, all of which have different terms. Figuring out treaty provisions is one of the more challenging aspects of the taxation of aliens.
In addition to the Form 1040NR (or Form 1040NR-EZ) you are required to file Form 8843, "Statement for Exempt Individuals and Individuals With a Medical Condition." This is an information form that must be filed even if you have no income to report. It simply identifies you as an "exempt individual." Being an exempt individual does not mean you are exempt from paying income tax in the United States.
Most aliens who enter this country become residents for tax purposes after living here for only 183 days under what is called the "substantial presence test." The law says that you, as a student on an F or J visa, are exempt from the substantial presence test for a period of five calendar years, hence the term exempt individual. That is why you are considered a nonresident alien for that period of time.
Where to find help
Most American taxpayers pay tax consultants to fill out their tax return. However, you could complete your own return if you know enough information about the taxes.
Also, there is free help available for taxpayers of modest means. The IRS sponsors a Volunteer Income Tax Assistance (VITA) program to help low-income taxpayers. I coordinate such a program at the University of Minnesota, and supervise the preparation of hundreds of tax returns for international students each year. If you have a VITA program at your school, make sure that the volunteers are trained in nonresident alien taxation. If you do not have a VITA site at your school, contact the international student services office and ask one of the counselors to work on getting one started for the benefit of the international taxpayers on campus.
Gary W. Carter provides tax assistance to both residents and non-residents filing in the United States. He received his Ph.D. from the University of Texas at Austin and he is the Associate Director of Graduate Tax Studies at The Carlson School of Management (University of Minnesota). For more information or more detailed help with tax issues, visit his site at www.thetaxguy.com.