Taxes on funding package for Canadian student in California

[mc356]

I'm new to gradcafe and hoping someone here can help! Very confused on tax regulations for Canadian PhD students studying in California at the UC schools. I was recently accepted with funding at Davis (TA salary, plus full tuition and non-resident tuition remission) and San Diego (stipend, plus full tuition and non-resident tuition remission), and I'm trying to figure out how taxes work and how much of my stipend or salary would be left over after all taxes. Do I pay US taxes at state and federal level AND Canadian taxes as well? Any others in similar position who can explain their experience? Basically, I'm trying to figure out if I can afford this.

Any thoughts are much appreciated! Thanks in advance.

 

[UnawareInGeneral]

You will be taxed by both the federal and California state governments on your pay as a tuition assistant. Stipends are not taxable, income as a TA, GAR, etc are all taxable. I have no idea if Canada will expect a cut as well. Depending on how much they are going to pay you to TA you may end up in a tax bracket that involves losing a fair bit of it to taxes. 

California has the highest state taxes in the United States at around 13% FYI. 

Cost of living is higher in all respects in both Davis and San Diego with San Diego being in the top ten for most expensive cities in the US. (I lived in San Diego for awhile, but it was years ago so. I can say that it was expensive then and nothing seems to have changed)

Biggest hit is housing across the board in almost every single place in California. Housing is higher in Davis and San Diego than the rest of the US by wide wide margin. 

 

Hopefully his is accounted for in the level of pay you receive from the University (although that will possibly move you into a higher bracket of course)

 

I also know know that you can expect to be taxed on any scholarships, fellowships, and grants that exceed your tuition and fees costs. For some reason anything labeled as a "stipend" is exempt from being considered income however. 

Also, when you file as a non-resident (not a citizen of the US) you cannot:

A). file online

B). Claim dependents

C). Use earned income credit as deductions (to do with paying tuition and attending school while supporting child dependents specifically)

D). Use education credits (can't get a reduction based on money spent on tuition)

You also should not have to pay social security or Medicare taxes if you are not in he US more than 5 years (so if you come down here and they deduct that the first year or two, that's wrong)

 

 

Once you get into things like claiming non-resident status in Canada so they know you are elsewhere at the moment, how you do that (although I know you can), or things like claiming tax credits in Canada or the US for taxes you paid in the other country (which you can definitely do) I can't say much other than I know these are all realities. 

You will have monies withheld from your TA pay before it ever gets to you though, guaranteed. 

[TakeruK]

Hello! I am also a Canadian in California and I can answer your questions  Here are some tips, separated by country, and then some tips that relate to the Canada-US tax treaty. This is super duper long so if you want the very short answer: Expect to pay about 13% in taxes total to all US tax sources. To be safe, budget 15% of income to go to taxes and get a pleasant bonus each year when you file taxes. More details below.

US tax tips:

0. In California, you will pay federal taxes and state taxes. Unlike in Canada, you actually file your federal and state taxes separately and you must finish your federal tax first in order to be able to complete your state taxes.  Depending on the city, you may also pay municipal taxes. As soon as you enter the US, you should keep a clear record of every single time you enter/leave the US and separately, every single time you enter/leave the state of California. You will need this to complete your taxes and it's a pain to try to reconstruct this each year at tax season. The number of days for the federal taxes is not as important now because you will be a non-resident for quite awhile, but for the state, it's important because taxes are pro-rated by the number of days you are physically present. For each trip out of the state/country, note the day you leave, the day your return, and what kind of lodging you stayed at while away. You will need this for your tax return.

1. Your stipend is likely going to be considered taxable income. I think there are only very few special fellowship cases where your stipend is tax-exempt. Like @UnawareInGeneral said, in the US, monies spent towards tuition and required book fees are tax-exempt. So you will NOT be taxed on your tuition waiver in the US. If you keep all receipts for required books and supplies, then you will also be able to deduct these costs from your taxable income as well. However, you must keep receipts and you must be able to prove that they are required in order to complete your class. So, for example, if you must buy a special book or if you must buy a special calculator then it's deductible. You cannot deduct things like pens, notebooks, optional textbooks, or other things aren't specially required for the class. 

2. This Wikipedia page has a great breakdown of the US progressive tax brackets for federal taxes. Again, as @UnawareInGeneral said, as non-residents, we cannot claim a few things. In addition to their list, note that we also cannot claim the "standard deduction" of $6,350 (as of 2016). We can only claim the "personal exemption" of $4050 (as of 2016). If you are familiar with Canadian taxes, the "personal exemption" is analogous to the "personal amount" deduction we have in Canada (which is $11474 in 2016), but just worth a lot less. (And they say we pay more taxes in Canada, eh?).

3. If you are married, you and your spouse must filed as "Married, filing separately". As pointed out above, this basically means you cannot claim dependents and you cannot take advantage of the better tax rates for families. 

4. So, from the Wikipedia page, you see the marginal tax rates. There's an example there that you can follow to estimate tax owing too. Here's a quick guide, assuming your stipend is $25,000 per year. First, you take off the personal exemption and any deductions for books etc (from #1 above). Let's say you have no books, so it's just the $4050. So, your total taxable income for a year is $20,950. The table says the first $9,325 is taxed at 10%, so you will owe $932.50 from the first $9,325 earned. The remainder is $20,950-$9,325 = $11,625 and this portion is taxed at 15%. So this is another $1743.75 owed in taxes for this tax bracket. Unless you are making more than $40k per year, you won't ever reach the next tax bracket. So you can estimate your total federal tax owing to be $2676.25 for this example, which is approximately a 10.7% tax rate. 

5. Now, you need to pay your state taxes. @UnawareInGeneral is correct that the highest tax bracket for state taxes is 13.3%, but as humble grad students, we will never reach this level of taxation. You can use this tax calculator from the state of California to estimate your tax owing. Enter the number after the federal personal exemption (there are other California specific exemptions too, but as non-resident, we rarely qualify for any and also our tax rate is low enough that it won't make a big difference). So, continuing this example, you would enter $20,950 into that calculator and see that your tax owing to California will be $376. This is a 1.7% tax rate. In addition, as a non-resident, your taxes and exemptions are pro-rated for the number of days you are in California.

6. Finally, you may have to pay municipal taxes. I don't know it for all the cities. I am not sure if students have to pay the municipal tax in my city, but I know that my spouse paid about $30 in taxes for income approximately the same as a student's (but they were not a student). So this is a small number. 

7. As also pointed out above, you do not pay FICA taxes (Medicaid and Social Security), which is around 6%. You should not pay this as a grad student, regardless of your foreign status. But being a non-resident doesn't always exempt you from paying FICA taxes. My spouse had to pay them even though we've been here less than 5 years. It's a little complicated and I admit I don't fully understand all of these details. Nevertheless, as a student, you shouldn't have to pay them!

8. So, ignoring the tiny municipal taxes, you should expect to pay about $3050 in taxes for a stipend of $25,000 to IRS and California. This is a total tax rate of approximately 12.2%. I generally tell Canadians to budget 10%-15% for taxes. Also, keep in mind that your school will likely withhold taxes from your income. If you fill out the proper paperwork upon enrollment (they will give it to you), your withholding will be about 14%. So you should get a little bit of money back each tax season. But this also means that you should budget your month-to-month expenses to consider a 14% withholding. Sometimes, the school doesn't give you the right form and the standard practice, without this form, is to withhold the highest tax bracket from international people!! So if you are seeing a 30% or more withholding on your first paycheck, you should immediately talk to HR to sort it out.

9. Misc. notes: As a non-resident, for federal taxes, you are only taxed on US-based income. So if you are receiving income from Canada from any source (e.g. a Canadian scholarship, a side business you might have etc.) you don't have to claim it on your US taxes. However, for California state taxes, you are taxed on any income paid to you for work in California, regardless of source. So, if you are receiving a Canadian fellowship to go to school in the US, you will pay California tax on that. But if you are making money from your side business in Canada, then it's not taxable in California.

10. Remember, US taxes are due earlier than Canadian taxes (April 15 instead of April 30). However, you also typically get your tax forms in the US much faster than you do in Canada. This works out because you have to file your US taxes before you can file Canadian taxes. You must do them all either by hand or with tax software and then print it out and mail it in. You just need to have it stamped by the post office no later than April 15. Most schools will provide free federal tax software to international students (I think it's required to) but not state taxes. Doing state taxes by hand is a pain and I think it's totally worth the $25-$35 to pay for the software that will do it for you. If you do buy software (or via an online service), make sure it's specifically for non-resident alien taxpayers. A lot of software are only for residents and they won't help us!

Canadian tax tips:

1. Unless you are required to for some other reason, you probably should NOT claim non-resident status in Canada. I find that there are a lot more benefits to keeping resident status in Canada than to switch to non-resident status but you should decide for yourself after reading the list below. @UnawareInGeneral listed some of the things you can't do as a non-resident in the US and they are all negative. Similarly, when you are a non-resident in Canada, you also lose out on a lot of benefits as well. I'll get into that below. The Canada Revenue Agency (CRA) allowed me to keep my Canadian-resident status while I'm in the US as a student. They required my spouse to change to non-resident though because they are not a student.

2. As a Canadian resident taxpayer living abroad, you must report all taxable worldwide income to the CRA. In Canada, graduate student stipends are not taxable if they are being used to support your graduate education. When I was in my Canadian MSc program, I did not pay any Canadian taxes on fellowships and scholarships, only Research Assistantship and Teaching Assistantship income (i.e. things where I receive a T-4 slip). However, in the United States, for my particular school, we might work as researchers and teaching assistantships, but the school is adamant that we are not employees. So, when I talk to the CRA agent (on the tax hotline) about this, they deem that since we are not working, the money is not taxable in Canada. They say I should not claim it at all.

3. However, since you are going to a UC school where you would be unionized, I assume that maybe you might have employment income that might be taxable. I'm not sure since I've not experienced that. But I do know what happens when you do have taxable income because my spouse moved to the US with me and worked (as a "real person", not a student) so they paid taxes to the US and to Canada on their US job. What happens is that first you convert your US income into Canadian dollars. Then you fill out a form to determine your "foreign tax credits" along with your CRA tax return. Basically, you calculate how much taxes you would have owed in Canada if that money was earned in Canada. Then, you determine how much taxes you already paid to all foreign tax collectors (at all 3 levels). This counts as "paid tax credit" towards how much you owe in Canada. The point of this law is to prevent you from being double taxed. That is, if you would have owed $1000 in taxes to Canada but already paid $900 to the US, you only owe $100 to Canada. Unless you are making a ton of money in the US, you are very likely to owe less to Canada than you would in the US and therefore not have to pay any extra. Let's say it's the worst case scenario and you are taxed in Canada for all of your UC stipend. Continuing our $25,000 income example and assuming an exchange rate of 1.3 CAD per USD, this is $32,500 CAD in income. Deduct $11,474 CAD personal amount and you will be paying Canadian taxes on $21,026 CAD of income. At a 15% base tax rate, this is $3153.90 CAD in tax owing. Now, you already paid $3050 USD in taxes to the IRS and the state of California. Convert this to CAD and the CRA sees that you've paid $3965 CAD to foreign tax collectors, which is more than the $3153.90 CAD you would have owed in Canada. So you would not have to pay any extra taxes to Canada.

4. As a Canadian resident attending school in the US, you are eligible to claim education tax credits in Canada just like you did when you were at University in Canada. You should ask your school to fill out the TL-11D form (link: http://www.cra-arc.gc.ca/E/pbg/tf/tl11d/) to claim amount paid towards tuition as tax credits. Some people on these forums in other threads reported that their school refused to do this so your mileage may vary. I have been able to this at my school with little problem. You can claim this tax credit even if you don't directly pay tuition. That is, if you have a tuition waiver, it's like you were paid the money and then spent it on tuition. Tuition waivers definitely are not taxable in Canada. However, if you do have tuition tax credits and if you must pay Canadian taxes on US-income, the CRA laws require you to "spend" any tax credits (including carryover amounts from previous years) before you can apply the Foreign Tax Credit. I checked this with the CRA agent. So, in this sense, you are being "double taxed"---you won't pay more money out of pocket but you are losing credits that could have been applied later on. They are aware that the current law is not consistent with the intention of not being double taxed. The nice CRA agent said that they receive many calls about this question but until the law is changed, this is what happens.

5. As a Canadian resident living temporarily abroad, you are also eligible for the refundable income tax credits as well as the non-refundable credits mentioned above. So by filing my Canadian taxes with a $0 taxable income, I still get a few hundred dollars per year for various refundable tax credits. 

6. Unfortunately, as a resident filing from abroad, you may not NETFILE your CRA taxes. So you also have to mail in your paper tax forms! You also need to attach a copy of all your US tax forms with your CRA tax forms. So, you must do your US taxes first, then your CRA taxes. The order I work in is US-Federal taxes (Form 1040-NR), then California state taxes (Form 540NR) and then Canadian tax forms (Schedule T1).

7. So, overall, you should decide whether you are better off changing to non-resident to keeping resident status in Canada. Compare the benefits of Tip #4 and #5 vs the costs of potentially losing carryover Canadian tax credits. 

US-Canada tax treaty tips:

There exists a tax treaty between Canada and the US where if your taxable employment income is less than $10,000 in a tax year, then you pay zero US taxes on your income. So you might be able to claim this on your first year in the US (if you arrive in September, you will likely earn less than $10,000 in the first few months). Non-resident tax software will automatically detect which tax treaties you are eligible for and help you make the claim. Note that this is not a progressive tax thing, so if you earn $9,999 USD then you are eligible and pay zero taxes, but if you earn $10,001 USD, you pay the full amount of taxes. I don't know what happens if it's $10,000 USD exactly. 

 

 

So, I hope that was helpful. It's basically a brain dump of everything I know and what I try to tell to Canadians who come to my school.

[mc356]

This is amazing! I'm going to print this, this is gold. Thank you so much for all your help, and for taking the time to write all this out. Everything is so clear and thank you for the great examples and for breaking it all down so well. Amazing! You saved me hours of stressing.

 

[Beals]

26 minutes ago, TakeruK said:

So, I hope that was helpful. It's basically a brain dump of everything I know and what I try to tell to Canadians who come to my school.

Wow, you are amazing for taking the time to share so much information!!

[coffeebuzzed]

Hey all! I haven't commented here before, but I have read quite a few posts (especially about filing Canadian taxes as a PhD student in the US). Unfortunately, I just landed myself in some hot water: I've been reassessed, and the bottom line is not good (>$4000 owing). Yikes! I want to check if I've misinterpreted anything. I can post this in a new thread if that's preferable, but since it's related to the same topic, I thought I would try here first. 

I moved to the US and started my PhD in the fall of 2016; before that, I worked in Canada. In the US, I receive a graduate assistantship (~20,000 USD) and a tuition waiver (which is applied directly on my account). On my Canadian taxes, I reported my NSERC (T4A), and my income from my Canadian job (T4); I didn't report my US income as it's intended to support my studies, and I didn't report the tuition waiver, since it's not "income" in any real way (no W2). I did claim tuition credits, though, and submitted a TL11A. 

Unfortunately, I was audited, and the official decision was that because "an employer, union, or other organization reimbursed your tuition fees, or you received a reimbursement or assistance through federal, provincial, or territorial job training program, and the reimbursement was not included in your income." So, they reset all of my tuition credits to $0 and I got dinged with a heavy balance. 

Has this ever happened to anyone else? Should I have reported the tuition as "foreign income"?

Thanks! 

[TakeruK]

A couple of things I've learned / got clarified recently:

1. Effective Jan 1, 2017, the CRA updated its documents and instructions for students filing taxes. Basically, "income to support your studies" can still be taxed depending on how your school/employer treats that income. The documents now explicitly gives examples like, "if you are paid for a TA or RA ship to support your studies, this is employment income and is taxable". But if you are paid through a fellowship where no work is expected/required to receive the funds, then it's a scholarship/fellowship and not taxable. This is my case, which is why I think why my experience and others in this thread have been different.

2. Your tuition can only be claimed as credit if it is awarded through a fellowship or a scholarship. Like your notice said, if it's "reimbursed" by your employer, in exchange for work etc. then it may not qualify. Perhaps you can claim it as employment income but then the CRA may need some documentation. Again, my department does a weird thing where we are just simply awarded a giant fellowship/scholarship that covers our stipend and tuition and we are not required to do any work (TAing is considered part of our education and we don't get paid for it, research work is considered coursework towards our degree). I suspect they do this to avoid considering us as employees so that we can't unionize (although the NLB has ruled otherwise).

---

7 hours ago, coffeebuzzed said:

Hey all! I haven't commented here before, but I have read quite a few posts (especially about filing Canadian taxes as a PhD student in the US). Unfortunately, I just landed myself in some hot water: I've been reassessed, and the bottom line is not good (>$4000 owing). Yikes! I want to check if I've misinterpreted anything. I can post this in a new thread if that's preferable, but since it's related to the same topic, I thought I would try here first. 

I moved to the US and started my PhD in the fall of 2016; before that, I worked in Canada. In the US, I receive a graduate assistantship (~20,000 USD) and a tuition waiver (which is applied directly on my account). On my Canadian taxes, I reported my NSERC (T4A), and my income from my Canadian job (T4); I didn't report my US income as it's intended to support my studies, and I didn't report the tuition waiver, since it's not "income" in any real way (no W2). I did claim tuition credits, though, and submitted a TL11A. 

Unfortunately, I was audited, and the official decision was that because "an employer, union, or other organization reimbursed your tuition fees, or you received a reimbursement or assistance through federal, provincial, or territorial job training program, and the reimbursement was not included in your income." So, they reset all of my tuition credits to $0 and I got dinged with a heavy balance. 

Has this ever happened to anyone else? Should I have reported the tuition as "foreign income"?

Thanks! 

Here is my non-expert advice for your specific case. But first, this is just a random person giving you some thoughts based on their own experience. Please don't consider this as actual tax advice and consult an expert if you need it. 

I am assuming this is for the 2016 tax year, since it's too early for assessments from the 2017 tax year. So this probably means most of your taxable income is actually from Canada, not the US grad program (as you started in Fall 2016). There's not much you can really do if you were hoping to use your US education credits to offset your Canadian job income, other than perhaps finding a way to report tuition as income or scholarship (talk to your school to see how they treat it).

Make sure your T4A (NSERC funding) is **not** counted towards your taxable income in Canada.

You should also consider reporting your US school's graduate assistantship income. Since it is an assistantship, I think it is actually taxable income. But this is probably more good news than bad because that means the taxes you paid on this income will count as foreign paid tax credit on your Canadian return. 

If you have not been using tax software for BOTH your US and Canada taxes (not the same software though), you should. Doing this by hand would lead to a lot of missed credits etc. 

[wookie55]

thank you sooooo @TakeruK!!!  This is absolutely soooooooooo incredibly helpful. I have been completely stressed trying to figure out the tax situation as a Canadian PHD student in California.   I was so worried I might have to pay both US and Canadian taxes on the fellowship!!! Also so glad I can keep the residency status in Canada without having to pay Canadian taxes as well. 

THIS IS SUCH A RELIEF. THANK YOU!