Funding and Taxes as an International student in America

[purpledinosaur]

I've been offered an excellent funding package at one of my top choice schools and I'm really excited about it! I'm just wondering what the deal is with paying taxes as an international student in the US. I'm from Canada and I have no idea how it works over there. The school is paying my tuition and giving me a stipend. What do I pay taxes on? How much do I pay in terms of taxes? Does it depend on whether I have F1 or J1 status (I am assuming I'll have F1)?

Any help would be super appreciated! I may also post this in the "Bank" section.

[TakeruK]

Hi! I'm also from Canada and have the same question. In my letters of offer, they explicitly say that if we get a tuition waiver, it is NOT taxable, but any other stipend (fellowship, scholarship, TA, RA money etc.) would be taxable. In Canada we didn't have to worry about this! Also, tuition waivers are only non-taxable if they are applied directly to tuition -- if you got an award that is paid out in cash/cheque which you could then use to pay tuition, then it's still taxable.

So, I tried to look up some IRS documents and I've only found a few things:

1. F-1 or J-1 status doesn't matter -- everywhere I look, the two terms are used together (e.g. "Section X applies to people with non immigrant F, J, M ... etc. visas"

2. We will most likely be classified as a "non-resident alien" for tax purposes (http://www.irs.gov/businesses/small/international/article/0,,id=96352,00.html). This means we only pay tax on US-based income, so we won't have to pay US tax on Canadian income. I haven't checked to see if, as residents of Canada, we would still be paying taxes on US income. I think we will have to file taxes with both Canada and US though?

3. The personal tax exemption in the US is really small -- only something like $3700/year (instead of ~$9000/year here in Canada). But I think their taxes are lower too. I can't find any source that tells me how the tax brackets work though.

4. Overall, Canadian friends who are now in the US for school told me that the tax is relatively small and we don't have to worry about it too much. However, my wife will be moving with me and getting health insurance for her would be really high due to non-student status so funding will be pretty tight for the first year so I am a bit worried about this too!

If you or anyone else know more, please add to this

[purpledinosaur]

Thank you, TakeruK!

It turns out that the Wikipedia page for US income tax is super helpful: http://en.wikipedia.org/wiki/Income_tax_in_the_United_States. Now I understand things like standard and personal deductions, tax brackets, etc. Yay!

It seems that the personal deduction is 3,700 and the standard deduction in 2011 was $5,800. So ultimately, most of my income would be taxed in the 10% bracket, which doesn't seem so bad. Also, I think my tuition waiver is applied directly to tuition (I need to check but I'm pretty sure), so I guess I will not be taxed on that.

Phew. This is stressful business! Thank goodness for Wiki...

[TakeruK]

Thanks purpledinosaur, that wiki page is amazing!!! Should have thought of that haha

Unfortunately, when I looked up "standard deduction" on wiki, it says: "The standard deduction, as defined under United States tax law, is a dollar amount that non-itemizers may subtract from their income and is based upon filing status. It is available to US citizens and resident aliens (for tax purposes) who are individuals, married persons, and heads of household and increases every year. It is not available tononresident aliens residing in the United States."

So, as holders of F1 or J1 visas, for the first 5.5 years in the US we won't have this standard deduction

But at least I can add to my personal exemption since my wife will be a dependent at least for the first year. And if we can file as "married filing together", that increases the amount of tax I have to pay under the 10% bracket

[purpledinosaur]

Ugh, this stuff is so complicated! That's a bummer. Ah well. Thanks TakeruK! I should read these things more closely, lol.

[Ludwig von Dracula]

I was filling out my taxes using Glacier Tax (my school bought a licence for all international students) and it said something about not paying taxes at all if your total income's under $10,000 (which it was last year, at least in the States, since I only moved here for the fall semester). Anyone else know anything about this before I get too excited?

[ANDS!]

You still have to file. It is unlikely you'll owe anything (more than likely to receive a refund).

[wreckofthehope]

Thank you, TakeruK!

It turns out that the Wikipedia page for US income tax is super helpful: http://en.wikipedia...._United_States. Now I understand things like standard and personal deductions, tax brackets, etc. Yay!

It seems that the personal deduction is 3,700 and the standard deduction in 2011 was $5,800. So ultimately, most of my income would be taxed in the 10% bracket, which doesn't seem so bad. Also, I think my tuition waiver is applied directly to tuition (I need to check but I'm pretty sure), so I guess I will not be taxed on that.

Phew. This is stressful business! Thank goodness for Wiki...

I think... from what I can tell going through my own taxes right now, that international students do not qualify to take the standard deduction.

My school withholds tax and then, if you are owed any, you get it back after filing - that's something to keep in mind in terms of what your monthly income will look like (it depends on the school and the state).

Anyway... on my 2011 income, which is half my overall stiped, I was already taxed approx $1500, and, if I have done my taxes correctly, I should get back half of that in overpaid taxes; so, the total tax I actually will end up paying is just under 10%. I didn't pay state tax on 2011 income, because I hadn't been living here for enough days of the year to qualify. So, presumably total tax on next year's stipend will be higher, something in the region of 15%. I assume (possibly erroneously) that the total percentage will be similar in most states, except those without personal income tax.

And yeah, you don't need to report a scholarship that goes directly to tuition as it is not taxable.

You can also deduct money you spend on supplies and books that are directly needed for you courses - so, I deducted all the books that were required for my classes (stuff that isn't on the syllabus you can't deduct).

Edited March 24, 2012 by wreckofthehope

[Galahad]

Hi! I'm also from Canada and have the same question. In my letters of offer, they explicitly say that if we get a tuition waiver, it is NOT taxable, but any other stipend (fellowship, scholarship, TA, RA money etc.) would be taxable. In Canada we didn't have to worry about this! Also, tuition waivers are only non-taxable if they are applied directly to tuition -- if you got an award that is paid out in cash/cheque which you could then use to pay tuition, then it's still taxable.

So, I tried to look up some IRS documents and I've only found a few things:

1. F-1 or J-1 status doesn't matter -- everywhere I look, the two terms are used together (e.g. "Section X applies to people with non immigrant F, J, M ... etc. visas"

2. We will most likely be classified as a "non-resident alien" for tax purposes (http://www.irs.gov/b...d=96352,00.html). This means we only pay tax on US-based income, so we won't have to pay US tax on Canadian income. I haven't checked to see if, as residents of Canada, we would still be paying taxes on US income. I think we will have to file taxes with both Canada and US though?

3. The personal tax exemption in the US is really small -- only something like $3700/year (instead of ~$9000/year here in Canada). But I think their taxes are lower too. I can't find any source that tells me how the tax brackets work though.

4. Overall, Canadian friends who are now in the US for school told me that the tax is relatively small and we don't have to worry about it too much. However, my wife will be moving with me and getting health insurance for her would be really high due to non-student status so funding will be pretty tight for the first year so I am a bit worried about this too!

If you or anyone else know more, please add to this

This is correct. I'd also suggest using TurboTax.com (it's free!) for your taxes. I used them when I had a paying internship under OPT and their calculations were right and I got my return on time and everything. I've tried a few other programs and this one turned out to be the most idiot-proof one.

And while you WILL get money back for taxes most likely (I was told by my school's ISSS that 90% of foreign students do) do NOT budget on it. I find a lot of people over calculate and it's better to budget wisely and then have extra money for a rainy day then count your chickens before they hatch.

[TakeruK]

Thanks for the TurboTax.com suggestion. I was worried about the size of the tax payment because the amount of taxes I pay and whether or not I'd get it back determines whether the stipend is enough to live on or not! But in recent good news, I received an award from Canada, so while my total funding package will be adjusted so my stipend is the same, this splits my income across 2 countries and hopefully this means I will owe less tax to each country...but more paperwork!

[Galahad]

Think of it as being paid to do paperwork then.

Oh and if you have to move from Canada to the US for your program, you can count the moving expense as a deductible so you get even more money. I'm guilty as charged of this one and yes, it did help out a tiny bit. But every bit counts.

[TakeruK]

Thanks, I'll be sure to keep a record of my moving expenses too!

[Galahad]

Welcome. I wasn't asked by the IRS to show proof (read: receipts, bills, etc) of it but I've heard of cases where people were so remember to keep those in a safe place too.

[hope4fall2012]

Are you guys sure we'll be classified as non resident aliens? The wikipedia article (http://en.wikipedia.org/wiki/Alien_%28law%29) says that a resident alen has to have either a permanent or temporary residence in the foreign country. As students, we do have a temporary residence in the US right?

I'm sorry if I'm being naive here. I have no prior experience/knowledge with 'these' things..

[TakeruK]

Are you guys sure we'll be classified as non resident aliens? The wikipedia article (http://en.wikipedia.org/wiki/Alien_%28law%29) says that a resident alen has to have either a permanent or temporary residence in the foreign country. As students, we do have a temporary residence in the US right? I'm sorry if I'm being naive here. I have no prior experience/knowledge with 'these' things..

Yes -- there is a clause somewhere in the IRS documents (can't find it now, but maybe it's in the links above) that explicitly excludes F and J visa holders from the normal resident status for the first 5 years in the US. That is, normally, to be a resident for tax purposes, you basically have to be living in the US for 183 days out of the last year (with some weighting calculation for days in the last 2 and 3 years). However, F and J visa holders are always non-resident until 5 years has gone by, then we get the same treatment as everyone else....so most likely we can file as residents in our 6th tax year. A friend told me that once you are a resident though, you can go back and revise your last 5 years worth of tax returns and re-file as a resident and thus get all those tax credits back. He said he wasn't sure if it was actually legitimate, but his tax person did it for him and it worked. Maybe there were some other circumstances though.

[Safferz]

I think... from what I can tell going through my own taxes right now, that international students do not qualify to take the standard deduction.

My school withholds tax and then, if you are owed any, you get it back after filing - that's something to keep in mind in terms of what your monthly income will look like (it depends on the school and the state).

I thought all international students have 14% withheld from their stipends?

[hope4fall2012]

Yes -- there is a clause somewhere in the IRS documents (can't find it now, but maybe it's in the links above) that explicitly excludes F and J visa holders from the normal resident status for the first 5 years in the US. That is, normally, to be a resident for tax purposes, you basically have to be living in the US for 183 days out of the last year (with some weighting calculation for days in the last 2 and 3 years). However, F and J visa holders are always non-resident until 5 years has gone by, then we get the same treatment as everyone else....so most likely we can file as residents in our 6th tax year. A friend told me that once you are a resident though, you can go back and revise your last 5 years worth of tax returns and re-file as a resident and thus get all those tax credits back. He said he wasn't sure if it was actually legitimate, but his tax person did it for him and it worked. Maybe there were some other circumstances though.

Thanks a lot.. Am I the only one who finds all this complicated? Like starting grad school and moving was not stressful enough.. Well atleast we have time till the April of 2013 to worry about taxes. Unless Dec 21, 2012 happens..LOL..

[TakeruK]

I find it super complicated too! I know that some schools' International offices actually have tax seminars, where you bring all your documents and tax forms and everyone fills out their forms together, led by some expert! I have a feeling those will be a huge lifesaver for me next Spring. And there should be a few other students in our position that we can ask for help. So we definitely won't be alone!

I thought all international students have 14% withheld from their stipends?

I think this might be dependent on the school? Others have told me that if they are being paid for TA or RA, then taxes are withheld upfront so you might get some of it back when you file taxes. But if you are funded on a fellowship, you might get all of the money right away but then have to pay back taxes each year.

Edited May 1, 2012 by TakeruK

[Safferz]

I think this might be dependent on the school? Others have told me that if they are being paid for TA or RA, then taxes are withheld upfront so you might get some of it back when you file taxes. But if you are funded on a fellowship, you might get all of the money right away but then have to pay back taxes each year.

IIRC it's US tax law, so applies across the board regardless of what school you're going to. I remember reading that it may be different if your country has a specific tax treaty with the US, so I should probably look into whether Canadians are different. I hate having to figure this stuff out!

[plastic_enthusiast]

I remember worrying about the taxation issue before I started my degree in the US, but it turned out to be nothing to worry about. My taxable income was automatically withheld from my monthly stipend payment; I didn't even notice it was gone, because it wasn't very much. I filed taxes at the end of each year, with a lot of help from my wonderful international office who offered tax seminars, and I got a refund each year (a few hundred bucks each time).

Talk to your international office, and always remember that the taxation system is not set up with foreign students in mind, so most of the tax regulations don't make sense. Looking for sense in tax law is like looking for sense in immigration law; it's just not there. Your international office should be able to help you fill these forms out, and I'd rely on them way before I'd rely on TurboTax (I use it now that I'm a US resident, but I'd never have used it on my F-1). It really was very simple.

[Ludwig von Dracula]

On the other hand, you might encounter an International Student Office where everyone is expressly FORBIDDEN to give you any tax advice. This was my experience (also with administrative workers in my home department). They must have given some bad information in the past and gotten sued or something. They just bought us a licence for a Turbo-Tax-esque program and basically said "you're on your own." I still shake my head when I think about this.

[plastic_enthusiast]

On the other hand, you might encounter an International Student Office where everyone is expressly FORBIDDEN to give you any tax advice. This was my experience (also with administrative workers in my home department). They must have given some bad information in the past and gotten sued or something. They just bought us a licence for a Turbo-Tax-esque program and basically said "you're on your own." I still shake my head when I think about this.

Oh, wow. That's terrible. I don't know how they expect students to figure all of this out by themselves without help from more than just some program. At least the chances of the IRS going after an international student are pretty small - and, as I found out recently, many don't even file taxes because they don't think they have to - but still, what a headache.

[TakeruK]

IIRC it's US tax law, so applies across the board regardless of what school you're going to. I remember reading that it may be different if your country has a specific tax treaty with the US, so I should probably look into whether Canadians are different. I hate having to figure this stuff out!

Oh I didn't know it was US tax law to force tax deduction from your "paycheques". Cause even though federal tax rates are the same everywhere in Canada, not every employer has to deduct taxes directly from your paycheque. If you fill out the TD1 form and have enough tax credits, you can choose to not have taxes deducted and just pay the difference at the end.

But from people I know, at some schools, some fellowships are not tax deducted when they are paid out, but you still have to pay tax on them when it's tax time. At the schools that do it this way, the current graduate students warned us about it so that we put away a bit of the paycheque each month to pay the tax in the end. However, for them, it worked out that they only had to pay a small amount anyways.

Also I couldn't find the information online but when my Canadian friend filed taxes this year, he said apparently there IS some tax treaty between Canada and the US. But I have no details.

The International Office I mentioned that gave tax advice hires a third party person/group to run the "tutorial" session, so they probably have some waiver thingy that excludes from liability!

[hope4fall2012]

he said apparently there IS some tax treaty between Canada and the US.

Funny that you mentioned this. A friend just told me that there is tax treaty between the US and India that has some deductions for Indian who are on a student visa. I don't have the details either, but she did get a refund after she filed her taxes.

[Safferz]

Also I couldn't find the information online but when my Canadian friend filed taxes this year, he said apparently there IS some tax treaty between Canada and the US. But I have no details.

My financial aid offer says the following:

International students are subject to US income tax law. A US Social Security number or Individual Taxpayer Identification Number (ITIN) should be obtained as soon as possible. The law requires that 14% of the amount of a fellowship award that exceeds the cost of tuition and required fees (stipend) be withheld for tax payment purposes. The appropriate amount will be withheld from each stipend check. Students who claim exemption from all or part of this requirement based on a tax treaty between their home countries and the US should inform the Office of Student Receivables by filing Form W8BEN, available in the fall or online at www.irs.gov. This form is valid for three years and is renewable.

Here is more information on claiming exemption or a reduced withholding rate, and a page I came across for Canadian workers -- there certainly is a Canada-US tax treaty, but I can't find any info for Canadian students specifically and what the reduction/exemption would look like if we file the W8BEN.