Richard Furlong: So I see we're right at the top of the hour. And for those of you as just joining welcome today's webinar on the topic of U.S. Taxation of Foreign Students and Scholars. We're extremely happy that you're joining us today. My name is Richard Furlong. I am a Senior Stakeholder Liaison with the Internal Revenue Service. And it is my pleasure to be your moderator for today's webinar, which is slated for 100 minutes. Now before we begin, if there is anyone in the audience that is with the media, please send an email to the address that you see on the slide. Be sure to include your contact information, and the news publication with which you're associated. Our Media Relations and Stakeholder Liaison staff will then assist you and answer any questions you may have. And as a reminder, this webinar will be recorded and it will be posted to the IRS video portal in a few weeks. And that portal is located at www.irsvideos.gov.

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Kwong is a Senior Revenue Agent with U.S. Business Activities Practice Network, which is housed in the IRS Large Business &; International Division, specifically within the LB&;I Exchange with holding an International Individual Compliance Practice Area. James advises, he develops technical content and training. He facilitates workshop and network events. And he also develops the LB&;I campaigns in the area of inbound activities of non-resident alien or NRA individuals.

These areas include issues related to effectively connected income, the determination of U.S.

trade or business, the taxation of compensation from employment, income that may be exempt under a specific tax treaty, and also the taxation of foreign athletes and entertainers. So you can see he's a very busy man. Prior to joining the IRS, Mr. Kwong worked in public accounting as a Senior Tax Manager, and he specialized in tax planning and compliance for family owned businesses, and high-net-worth individuals. James received his Master of Science in Taxation from DePaul University, and his Bachelor of Science in Accounting from the University of Illinois at Chicago, and he is also a licensed certified public accountant. His colleague is Henry Dong is a Senior Revenue Agent. Also from the Large Business &; International Division. Henry graduated from the University of Michigan Law School. Henry has been working with the Internal Revenue Service for more than 20 years with an extensive knowledge and experience in international tax compliance issues related to nonresident alien individuals. So with that James, let me turn it over to you to kick off our presentation today. James Kwong: Okay, great. Thank you Rich, and very happy to be here. So thank you everyone for coming to today's IRS webinar. So in today's session, as Richard mentioned, we are going to cover the basics of the U.S. federal tax rules related to the taxation of nonresident alien taxpayers with the focus on foreign students and scholars. So if you look on this slide here, we do have today's agenda. So the objectives today are to first of all, explain the basic U.S. tax residency rules, identify common types and tax treatment of income earned by foreign students and scholars. We are also going to be identifying special tax exemptions for foreign students and scholars. And finally, we should be able to describe U.S. tax return information and information return filing requirements for foreign students and scholars at the end of this presentation. So let's talk about residency. So the U.S.

is home to many international students and scholars from every corner of the world. These visitors come to the U.S. under several nonimmigrant visa programs, and that includes the F, J, M, Q, as well as the H-1B visas. The majority of these of the students, they hold F-1 visas, while most scholars, and that includes professors, researchers, teachers, they come here under various chain one categories. So looking at the slide we have for foreign students, we have the F-1 visa, and that is the academic students and an accredited educational institution or in a language training program visa. The M-1 visa and that's for students who are in a vocational or non-academic program, other than a language training program. There is also the J-1 visa student visa. And that's for exchange students coming here and are sponsored by an exchange visitor program by the U.S. Department of States. For foreign scholars we have the J-1 non-student visa, and that's where a visitor who that would come here as a professor, physician, researcher, teacher or trainee. The Q-1 visa is available for individuals seeking to participate in an international cultural exchange program. And that purpose provides for practical training and employment. And it also uses the share the history, culture and traditions of an individual's home country with the US. And then we have the H-1B visa, and that is for temporary workers and specialty occupation and that would include accounting, engineering and information technology.

Okay, so one thing that we do want to point out that is sometimes it may can be confusing to sum is that visa status under immigration law is different than U.S. tax law. It's important to remember that visa status under immigration law is relevant to U.S. taxation in limited situation, and those are including determine the number of days of presence in the U.S. for purposes of determining residency for taxes. As described further later detail in this presentation, certain days are excluded from days of presence based on the type of visa. There are also situations under the Internal Revenue Code where visa status may be relevant, such as withholding tax rates, which can be affected based on the visa status. And finally, eligibility for treaty benefits can depend on the type of visa, while not required for treaty benefits. It can also it can provide information relevant for determining, whether a treaty may apply, such as the purpose of the visit. Okay, let's talk about determining U.S. Tax Residency Status. So determining an individual's residency status that is the first step in determining how to apply the U.S. tax rules. Once the residency is determined, then we will want to know which tax forms to file and how that individuals should be taxed. So there are two types of residency statuses for foreign visitors and that is the resident alien status and a nonresident alien status. A resident alien is an individual who is either a green card holder meets the Substantial Presence Test, or makes a first year election to be treated as a resident alien. Out of these three criteria we are going to focus on the Substantial Presence Test, and we'll get to that in a couple of slides. A nonresident alien otherwise known as a NRA is an individual who fails to meet any of those above criteria that we have just discussed. And there will also be a discussion later regarding the closer connection exception to the Substantial Presence Test, and also treaty residency determination. Finally, residency status is determined on an annual basis because the facts may change each year for an individual. There are also may be a situation in which an individual is considered a dual status alien. And that basically means that that individual may be considered both a resident alien and an NRA in a single calendar year. Okay, so let's talk about more about that Substantial Presence Test and I'm going to refer that test as the SPT. So as we previously discussed, if an individual passes the SPT, then that individual would be considered a resident alien for U.S. tax purposes. This test is basically based on counting days of physical presence in the U.S. So the meet the test, the individual must be physically present in the U.S. on at least 31 days during the year in question. And 183 days during the three-year period, that includes the year to question and the two years immediately before that, and we are counting all the days present in the U.S. in the year in question. Third of the days present in the U.S. in the first prior year. And then we also count a sixth of the days present in the U.S. in the second prior year. So, if you add up all those days in this formula, and it totals at least a 183 days, then the individual passes the SPT and will therefore be considered a resident alien for U.S. tax purposes for that year. And as previously discussed, residency status is determined on an annual basis. So therefore, this test would have to be applied every year determine tax residency. There are exceptions to the SPT calculation of counting days of presence in the U.S. and that's based on the taxpayers non-immigrant visa status. So, this is a situation in which visa status is relevant when applying the U.S. tax rules. So for foreign visitors present in the U.S. under an F, J, M and Q visa status. The SPT is calculated differently, these individuals will be considered exempt individuals. So an exempt individual would not be treated as present in the U.S. for purposes of the SPT. So in other words, you do not count the days of presence for an exempt individual. This exempt individual status does have some limitations, so for this exemption is based on the taxpayers use of this exclusion also in previous tax years. So the limitations are described in greater detail on next slide. But basically the individual must take into account prior visits to the U.S. when they were in an F, J, M or Q visa status. And for purposes of this limitation, even one day of presence in the U.S. during a calendar year would count as one year. Individuals claiming this exempt status they would have to file a Form 8843 and attach that to their tax return. So going into more detail on that limitation students that have an F, J, M visa, they can only exclude days of presence in the U.S. for only five calendar years. So after the fifth year if that foreign student is still in the U.S., he or she will have to start counting days in the U.S. for purposes of the SPT. For these individuals seeking to explore exclude more than five calendar years, they would actually have to establish the fact that they do not intend to reside in the U.S. permanently. They also have to be substantially complying with the requirements of their visa. So you have to look at the facts and circumstances and those are considered in determining if the individual has demonstrated an intent to stay in the U.S. and that would include whether that individual has maintained a closer connection with another country and whether that individual has taken steps to get a Green Card. For J or Q visa holders, these individuals will not be exempt as a teacher or trainee from counting days for purposes of the SPT for a particular year, if they were exempt as a teacher, trainee or student for any part of two of the six previous calendar years. So, if you have an individual that was present in the U.S. as a student, and that individual was exempt from counting days as a student for a couple of years, then let's say they start teaching, they will not be able to exempt their days in the U.S. for purposes of the SPT due to this limitation. However, again, there's another exception for individuals whose total renumeration is paid by a foreign employer, so if this is the case that limitation would be expanded to four out of the six previous calendar years. Okay, so after these limits discussed in the previous slides have been reached any days of presence in the U.S. would generally count towards the SPT, but as you all probably noticed by now, there are many exceptions. So let's talk about a couple of more. So, as a foreign person with the SPT, they can still be treated as an NRA for tax purposes. If they establish a closer connection to a foreign country in which that individual has to be present for 183 days or less in the U.S. They also have a tax home in a foreign country during the entire year. They have a closer connection to that foreign country, then to the U.S., and they have not taken any steps towards getting a Green Card. The other exception is qualifying under the residency article of an income tax treaty that the U.S. has with the foreign country. So that's another exception. So now that we have gone over a high level overview of residency, let's move on to our first polling question. Rich? Richard Furlong: Thank you, James. However, before I tee up the first polling question, I do want to acknowledge that we are aware that there are some problems with the closed captioning, a number of you have commented in the textbox. So we're working with our contractor to resolve that. So bear with us, but we hope to have that resolved fairly soon. So now let's look at our first polling question of today. Let me read it to you. A nonresident alien for income tax purposes is an individual who is A, Green Card holder. B, means the Substantial Presence Test, what is not a lawful permanent resident. C, is not a U.S. citizen does not meet the Substantial Presence Test, and is not a lawful permanent resident, or D, is a foreigner who temporarily resides in the U.S.

So which of these four categories is a nonresident alien for income tax purposes? Is it the individual who is a Green Card holder A, B meets the Substantial Presence Test, but is not a lawful permanent resident, or C, is not a U.S. citizen? Does not meet the Substantial Presence Test, and is not a lawful permanent resident, or D is a foreigner who temporarily resides in the U.S. Which of these is an NRA for income tax purposes? So let's take a moment here, let you make your entries. Okay, I think all of the responses have come in. So we'll stop the polling now.

And on our next slide, we'll share the correct answer, which is C, a nonresident alien for income tax purposes is an individual who is not a U.S. citizen does not meet the Substantial Presence Test and is not a lawful permanent resident. So and remember, for federal income tax purposes, someone is a nonresident for U.S. tax purposes, when they're not a U.S. citizen. They don't hold a Green Card, nor do they meet that SPT or Substantial Presence Test that James just described.

So I think about 85% of our audience got that answer, correct, James. So very good. So let me let you move on to our next topic. But you continue with an overview of U.S. Taxation. James Kwong: Great, thanks. Thank you, Rich. Okay, so since the focus of this webinar is the U.S.

Taxation of Foreign Students and Scholars, we are going to assume that these individuals are considered NRAs for U.S. tax purposes. So with that said, let's now go over the basic concepts of the U.S. taxation rules of NRAs. But before we do that, let's talk about resident aliens first, and this one's really easy. They are taxed the same as U.S. citizens, and that's going to be taxation on worldwide income. So that's why it's really important to really get the residency issue done first. So you know how that individual will be taxed. Nonresident aliens however they are taxed differently, they are taxed only on their U.S. sourced investment income, and income that is effectively connected with the U.S. trade or business. And we're going to go a little further into the taxation rules of each status later in this presentation. So while NRAs are generally taxed only on their U.S. source income and income effectively with the U.S. trade or business, they are also subject to more restricted rules on deductions and credits. Examples include generally not being able to claim standard deduction, they cannot claim education credits, or the earned income tax credit. Most NRAs cannot claim child tax credits or certain itemized deductions that are available only to U.S. citizens and resident aliens and those itemized deductions, including mortgage interest and real estate taxes. So as you can see, there are some significant differences between the taxation of U.S. persons and NRAs because NRAs are generally taxed on U.S. sourced income, understanding the basic rules of sourcing is really important. Sourcing of income is really a fundamental concept in international taxation.

Identifying the country in which taxpayers earn income is really an important step in determining the taxability of a certain transaction. So in general, the U.S. source rules are based on the location of the underlying income producing property or activity that generated the income. However, the source of certain income is also based on residency. So if you look on this slide here, this one summarizes the most common items of income and the factor determining the source of such income. So let's go through these a little bit. So for personal services income, the source of the type of income is the place where the services are performed. So the services are performed in the U.S., it would be considered a U.S. source, personal services that would include salaries, wages, commissions, fringe benefits, and self-employment income. For interest income, it is the residence of the payer that determines the source, so interest payments from U.S. residents or U.S. Corps they would generally be characterized as U.S. source income, interest paid by foreign corps or NRAs that would be characterized as foreign source income.

Dividend income, it is sourced where the payer corporation is incorporated. So generally dividends received from the domestic corp. that is considered as U.S. source and dividends received from a foreign corporation would be considered foreign source income. The source of rental and royalty income that is determined by the place where the property is located or used, so if you have rental property in the U.S., any rental income received for that property would be considered a U.S. source. Looking at gains of sales of real property, the factor determining the source is the location of that property. So gain or loss of the disposition of U.S. real property, that would be the gain from the sale of that would be the U.S. source, if it we're located in the U.S., gain from the sale of real property located outside the U.S. would be considered foreign source. So the gains on the sales of personal property, the code provides that the general rule that the source of the gain or loss from that sale, other than inventory based on the residence of the seller. The source of pension income is where the services were performed that earned the pension, so any pension benefits earned would be considered U.S.

source to the extent that they consisted of employer contributions for services within the U.S.

The source of scholarships, fellowships, grants, prizes and awards that would be sourced due to the residents of the payer, the source of income on the sale of inventory held for sale to customers in the ordinary course of business that would depend on whether the taxpayer acquired the goods by purchase or had produced them. For purchase inventory, though it would be generally determined by the location of the property at the time of the sale or inventory that is produced, the income from the sale of that type of inventory would be allocated in a portion on the basis of the production activities with respect to that property. So if inventory is produced entirely in the U.S., the income is U.S. source income, inventory produced entirely in a foreign country, and it would be considered foreign source. Income from the sale exchange of the property produced in both the U.S. in a foreign country would be considered mixed source and then allocation would have to be necessary. Okay, so let's move on to a more detailed discussion on the taxation of NRAs with a focus on foreign students and scholars, so most foreign students and scholars are considered NRAs under the SPT as they generally don't count the days of presence for their first two to five years in the U.S., depending on their visa type. So in general, a foreign person is subject to the U.S. income tax on two categories of income, income that is effectively connected with the U.S. trade or business, and U.S. source FDAP income. So FDAP income, and that is an acronym for Fixed, or Determinable, Annual, or Periodical income and this type of income that is not effectively connected with the U.S. trade or business, that would include items such as interest, dividends, rents, royalties, and it is taxed on a gross basis.

And that basically means that deductions are not allowed to offset this type of income. The income is also subject to a withholding tax, and that's at a 30% rate. And that could be reduced or eliminated by an income tax treaty, or another provision of the code. The second category of income again is income that is effectively connected income with the U.S. trade or business, otherwise known as ECI, Effectively Connect Income. So this type of income is taxable at the applicable graduated rates that's provided in the code and is taxed on a net basis. And that basically means that deductions are allowed to offset this type of income, as long as they're properly allocated in a portion to that U.S. trade or business. And an examples of this type of income for foreign students and scholars would include compensation for services performed in the U.S. self-employment income, and also possibly taxable scholarships. Okay, so although we're separating U.S. source FDAP and ECI into two categories, it's really important to note that FDAP income may or may not be treated as ECI. So it's really important to distinguish FDAP as ECI or non-ECI because as we talked about earlier, FDAP is not ECI is taxed differently than FDAP that would be considered ECI and all sort appears in a different section on the Form 1040-NR, and we're going to cover that later. U.S. source FDAP would be considered ECI, if it passes one of two tests, if it passes either the asset-use test or the business activities test. So under the asset-use test, FDAP income would be considered ECI, if that income is derived from assets used or held for use in the conduct of a U.S. trade or business. So an example would be interest earned on a bank account for a business that's held to meet the present needs of that business, or a capital gain on the sale of business equipment. Under the business activities test, the FDAP income that would be considered ECI, if the activities of that NRAs U.S. trade or business are a material factor in the realization of that income. So examples would include dividends or interest earned by a dealer in stocks, or let's say royalties earned in the active conduct of a licensing business. So again, U.S. source FDAP income can be ECI, if it meets either one of these two tests, if it does that set graduated rates on the net basis. If not, it will be non-ECI tests at a 30% rate on a gross basis or a lower treaty rate or a code basic. Richard Furlong: James, can you, I'm sorry, James. Go ahead. James Kwong: Can you hear me, okay? Richard Furlong: Okay, yes I can. James Kwong: Okay, great. Many students and scholars enter the U.S., they are authorized to work under the terms of the visa program, and receive wages and salaries for the performance of personal services in the U.S. Generally, the employer will issue a Form W-2 for income earned by the NRA employee. Under the Internal Revenue Code, the term trade or business within the U.S., it does include the performance of services within the U.S. so therefore, salaries and wages earned would be considered income effectively connected with the U.S. trade or business, therefore considered ECI and therefore subject to tax at graduated rates. So as you can see, it would be reported on line 1A of the Form 1040-NR, when that NRA files his or her tax return, there are situations in which wages may be exempt from taxation, and that would be under an income tax treaty that the U.S. has with the NRA's country of residence. So this is the case any wages paid to that NRA, which are exempt under an income tax treaty, they would be reported on a Form 1042-S with an exemption code 4 and that is the exempt under tax treaty code. Any additional U.S. source wages which are over the exempt amounts, again those would be taxable and reported on a Form W-2. For the wages that are exempt under a tax treaty, they would be reported on a different line item on the 1040-NR, that would be Line 1c, and they would also have to enter some information on Schedule OI. So in order for NRA to claim an exemption of income tax withholding due to an income tax treaty benefit, that NRA would have to provide the withholding agents some proper documentation. So in the case of compensation for services, they would use a Form 8233. And we're going to go over a comprehensive example towards the end of this webinar that will reflect these points along with some screenshots of that Form 1040-NR, so before we do continue, Rich, let's have another polling question. Richard Furlong: Very good, James. So here's our second polling question audience. A, NRA or non-resident aliens, U.S. source FDAP, remember, FDAP as James said is the acronym for Fixed, or Determinable, Annual or Periodical and NRAs U.S.

source FDAP income may be considered effectively connected income if A, it meets the asset use test, B, it meets the business activities test, C either A or B or D, none of the above. So an NRAs U.S. source FDAP may be considered effectively connected income with the U.S. trade or business, if A it meets the asset use test, B, it meets the business activities test, C either A or B or D, none of the above. So we ask that you take a moment, put on your thinking caps and then click the radio button that you believe best answers the question. And I'll give you a few more seconds to make your selection. So now we'll stop the polling. And let's share the correct answer on the next slide. The correct answer is C, either A or B, either the asset use test or the business activities test, and if you recall FDAP income can be considered effectively connected income if it meets either of these tests. Very good, James, 88% of the audience got that correct. So kudos to you. And I think we can move on. I'm going to turn the microphone now over to James colleague Henry to talk about tax exemptions for NRA students and scholars. Henry, it's all yours. Henry Dong: Okay, thanks, Rich. And since we're focusing on tax laws, we direct to foreign students and scholars. Let's bring up one item related to wages that James just discussed, that deviated from the normal source or income rules for these individuals. Under code section, 872(b)(3) compensation paid by a foreign employer to a non-resident alien individuals during the temporary stay in the United States for the performance of the personal services here are excluded from income as long as the individuals are considered as NRA for U.S. tax purposes on an F, J or Q visa. Also the payment are made by the foreign employer and for a purpose of this exception, a foreign employer can be NRA individual, a foreign partnership, a foreign corporation or it can be an office maintained in a foreign country by a U.S. entity or U.S. individuals. Okay, let's move on to another type of income that is common for the foreign student's scholars, and there is scholarship and fellowship grants. A scholarship is generally an amount paid to or allow to a student educational institution for purpose of study. And a fellowship grant is generally an amount paid or allowed to an individual for purpose of study or research. And please note that any advance that's paid to these individuals require them to perform personal service such as teaching, research, or other services generally are consider wages and shall be taxed as such even though they are named as scholarship or fellowship, and for degree candidates, any amount received as grant that are used for anything other than tuition or course related expenses will be taxable. If the recipient is a non-degree candidate, then any amount received as scholarship or fellowship grant will generally be taxable. Okay, let's get into a little more details on scholarship tax payments. Basically for NRA individuals, any U.S.

source income coming in the form of scholarship can be treated as one of three ways that can be tax free as qualified scholarship under Code Section 117, they can be exempt from U.S. tax by an applicable income tax treaty or they can be taxable as effectively connect income and subject to 14% or 30% withholding depending on the visa status and will be includable on 1040-NR filed by NRA. So let's first talk about the qualified scholarship. The qualified scholarship is a payment that meet the following conditions. First, the recipient must be a candidate for degree at a qualified educational institution. Second, the amount received are used to pay for tuitions and fees required for enrollment or attendance such as books, supplies or equipment, they are required for courses. So what's the degree candidate, the degree candidate is defined as someone who enrolled in a degree seeking program. A qualified educational institution is the institutions most of the university and colleges that maintains a regular faculty or curriculum and normally have a regularly enrolled body of students in attendance, where you carry on his educational activities. Any scholarship and fellowship grants, that is excludable under Section 117 does not have to be reported on Form 1042-S by the payor for students, they don't need to be reported it on any line of the 1040-NR by the NRA recipient when they file the tax returns. Scholarship payments that do not meet the exclusion criteria that we just discussed, what we consider as non-qualified scholarships, which will be taxable unless exempt under applicable income tax treaty. Examples of non-qualified scholarship payments may include payments for housing and meals, medical, stipends, travel, cash and also non-required fees for books, supplies and equipment. And especially for a taxable portion of scholarship or fellowship grants is subject to withholding at a tax rate of 30% or 14% under Code Section 1441. Any scholarship that is taxable will be reported on Line 1b of Form 1040-NR. And as previously discussed, if a scholarship or fellowship grants is considered a non-qualified grant, and taxable under the internal revenue code, it may still be exempt from tax if there is a particular income tax treaty, certain income tax treaties may have Student/Trainee articles which provides tax benefit for scholarship and fellowship grants for the students. And those grants assuming those grants are received in U.S. Any amount exempt under tax treaty will be reported by a payor on Form 1042-S with income code 16 which is a scholarship and fellowship grant income code and also have an exemption code 04 which is exempt under tax treaty. These amounts will then be included on Line 1C of Form 1040-NR which is, the Total Income Exempt by Treaty line on the tax return as well as included on Item L of Schedule OI and James is going to go over this type of income reporting for 1040-NR during our comprehension example towards the end of the webinar. Okay, in regards to capital gains, generally non-resident aliens are not subject to taxes on capital gains, if this such gains are not effectively connected with a U.S. trade or business unless they have a tax home in the U.S. and are physically present in the US for 183 days or more during the tax year. And just know that because NRA students and scholars may exempt their days of presence in U.S. for purposes of Substantial Presence Test as we previously discussed. The exemption of days does not apply for purpose of capital gains test rules under Internal Revenue Code Section 871(a)(2). So therefore, you may have an NRA student being taxed at 30% on U.S. source capital gains, if they are here for 183 days or more during the year even though, they are not treated as resident alien for tax purposes. And taxable capital gains such as gain on sales of U.S. stocks that is not effectively connected with NRA U.S. trade or business is subject to a 30% tax or lower treaty rate. And this amount would be reported on schedule NEC of Form 1040-NR Line 16. Another source of income that may be common for foreign students and scholars is passive dividend and interest income. For dividend and interest income that is not effectively connected with the U.S. trade or business, they both would be subject to 30% tax or lower treaty rates, the taxable dividend or interest income will be reported on Schedule NEC of Form 1040-NR Line 1 or Line 2. So note a very important exception on interest income here, there are certain types of passive interest income that qualifies for the portfolio interest exemption, meaning that this type of interest income would be tax free for NRA taxpayers, and this type of interest free income comes from deposits or withdrawable accounts with a U.S. Bank, U.S. savings and loan institution, U.S.

credit union or a U.S. insurance company as well as for your interest that are described in IRS Publication 519 as well as such interest income is not effectively connected with U.S. trade or business. So keep that in mind. Any interest income from this type would not be reportable on Form 1040-NR, even if the NRA receives a Form 1099 from the U.S payor. Prizes and awards are another common form of income from these types of taxpayers. Prizes that involve a payment in the nature of an award or recognition for some sort of special achievement, skills or knowledge in certain area or can represent an award won in a contest of some sort. And for example, a prize paid for winning the piano competition, a prize paid to a person for his or her outstanding achievements in certain area or research or price paid for winning some sort of contest are more examples. Unlike scholarship or fellowship grants, prizes and awards do not specifically intend that the grantee spend the prize amount, for the purpose of aiding his study, training, or research, but instead intends the prize to be an award which recognizes the achievement and may be spent in any fashion the recipient would like. So for this type of income, they are treated as a non-ECI, and therefore will be reported on Form 1042-S with income code 50 Other income. And the recipient will report that amount on Line 12 of Schedule NEC, Form 1040-NR, which generally is subject to 30% tax. So Rich, can we pause here for another polling question? Richard Furlong: Thank you, Henry. We certainly can pause for our third polling question. So, audience here it is.

Which of the following may be subject to U.S. federal income tax for a non-resident alien student or scholar? Is it (a), a qualified scholarship received for tuition and fees at a qualifying educational institution, or is it B, interest income earned from a U.S. savings bank or C, capital gain from the sale of U.S. company stock, or D, income earned from summer work performed in the non-resident aliens own country? So, which of the following income types may be subject to U.S. federal income tax for a non-resident alien student or scholar? Again, is it A, qualified scholarships received for tuition and fees at a qualifying educational institution, or B, interest income earned from a U.S. savings bank, C. capital gain from the sale of U.S.

company stock, or D, income earned for summer work performed in a non-resident alien home country. So we ask that you take a moment and then click on the radio button that best answers the question, we'll give you a few more seconds to make your selection. Okay, I think we can stop the polling now and tee up the correct response, which is C. Capital gains from the sale of U.S.

company stock may be subject to U.S. federal income tax for a non-resident alien student or scholar. So remember, NRA students and scholars at the time of their arrival in the United States, who have been present in the U.S. for 183 days or more are generally subject to 30% taxation on their capital gains that are not effectively connected to a U.S. trade or business for that tax year. And that's true, even though they remain non-resident aliens for U.S. tax purposes. So this was a challenging question, Henry, for our audience, only 46% less than half got the correct answer of C. So I think it may go to the point that while they remain can remain non-resident aliens, capital gains can be subject and will be subject to that 30% rate.

Is that correct Henry? Henry Dong: That's correct. Yes. And I'm sure some people may pick the answer B, right? Richard Furlong: I think perhaps, yes. But as you pointed out, that was the portfolio interest exemption. Henry Dong: Right, right, exactly. So yes, remember to look into the details of the type of categorized income. You may have an NRA student being taxed on U.S. source capital gains if he or she is present in the U.S. for 183 days or more during the taxable year.

So the correct answer is C. Richard Furlong: And Henry a discussed earlier, the earned income is sourced based on where it is earned, is that correct? number chose D, but when they're working outside the U.S. in their home country as James

Henry Dong: Correct. Yes, and again, the source of income that we discussed earlier. Richard Furlong: Right. Henry Dong: Basically for performance of personal service, and that remember NRA only subject to the tax in the U.S. source income. And working overseas even though let's say, even the payment is paid by U.S. University or other U.S. employer, because the fact they're working outside the U.S, the source income is source to foreign countries. So therefore the entire income were not subject to U.S. tax. Richard Furlong: Great. Thank you, Henry. So, it looks like you're going to continue to the discussion with some of the common tax statements and forms for non-resident aliens' student scholar. So let me turn it over to you to keep rolling.

Henry Dong: Okay, thanks. Yes. Okay, as you can see on this slide, we are going to show you some common tax forms that U.S. employers or payors issue to this NRA recipients up to the end of the tax year. So that they can use this information returns when preparing and filing their annual Form 1040-NR. The taxpayers should contact the issuer of the forms if they identify any errors and it does happen sometimes such as incorrect amount, incorrect income or exemption code and request the payor to amend the forms. And foreign students and scholars who works for U.S.

employers in the U.S. generally will receive W-2 Form for income earned, any portion of income that is eligible for treaty exemption, generally will be reported on Form 1042-S, with income code 18, 19 or 20 by the U.S. payors on that box 1 of the form. Income code 18 is for Compensation for Dependent personal services. Code 19 is for compensation for teaching and Code 20 is compensation during study and training. Taxable or treaty exempt scholarship and grants are generally reported on 1042-S which income code of 16 on box one. Tax exempt code, we also have exemption code 04 on box three. And NRA can also receive other tax statements such as 1099-B, 1099-G, 1099-DIV, 1099-INT and/or 1099-Misc if they received these type of income during the year. Taxability and applicable tax varies, it would depending on the income type and whether or not there's an applicable tax treaty. Okay, and now let's move on to talk about FICA taxes for NRA student and scholars. Generally, for NRA employees, compensation for employment performed in the U.S. is subject to U.S. Social Security and Medicare taxes. However, both internal revenue code and the Social Security Act allow an exemption from Social Security and Medicare taxes to non-resident aliens, students and scholars under F-1, J-1, M-1, or Q-1 visa.

And know that this exemption does not apply to spouses or dependents in F-2, J-2 or M-2 visa status because the purpose of these visas for entering into the U.S. is to accompany the primary visa holder. Other types of limitations consists of the following, exemption does not apply to employment not allowed by USCIS or to employment not closely connected to purpose which the visa was issued. The exemption also does not apply to those who change it to another immigration status. So any type of visa says other than the four we mentioned earlier is not eligible. And finally, the exemption does not apply to those who become resident aliens. There is only one exception for resident alien to be able to claim exemption on paying FICA tax, and that is when they are full-time students and the income was from on campus employment for that type of income.

And if an NRA student or scholars is qualified for FICA exemption but had FICA taxes withheld in error because sometimes the employer didn't know the NRA are qualified. So they will need to first come to the employer for refund and provide information displaying that they're eligible for exemption. And if the individual is not able to secure a refund on the employer, they may request a refund from IRS by submitting Form 843, which is a claim for refund form. And also the Form 8316, which is an information request form. The individual requesting the refund will have to mail a Form 843 along with 8216 along with some supporting documents. And this type of document will include like copies of Form W-2, copy of visa pages or the passport, copy of the Form DS-2019 for those who are under J-1 visa and copy of the Form I-94 which is arrival and departure record. And also they need to provide a statement from employer or a self-statement if not able to obtain statement from employer. statement if the employer. The IRS will review and verify the information provide to determine eligibility and issue the refund. Ok, let's talk about NRA withholding and reporting. Unlike U.S. citizens and resident aliens, NRA are subject to special withholding rules on their income, depending on the categories of income paid. When an NRA individual works as an employee and is paid compensation for services, the employer will withhold tax from the employee's wages at graduated tax rates. If the NRA receives payments for services as a nonemployee, that income would be subject to a 30% withholding rate unless there's an exemption available or if a lower treaty rate applies. And as mentioned before, the withholding rate for scholarship and fellowship grants is different. And this type income subject to or reduce the rate of 14% for certain student scholars on F-1, J-1, M-1 or Q-1 visa holders, all have applicable lower taxes rates. And our next two slides list the documentation that will be submitted to the employer to ensure proper withholding and information return reporting. So NRA students and scholars usually should notify their employer of their visa status by providing a visa and passport and providing applicable tax forms. And we have a Form W-4 and that's for employee withholding. The Form 8233 shall be provided to claim an exemption form withholding by the employer on wages for both dependent and independent personal services. And this slide continues list of withholding documentation, the Form W-8BEN is for claiming exemptions of income for all other income payments such as scholarship and fellowship grants. I remember submitting the Form W-8BEN and it is important whether or not the NRA individual can reduce rate or exemption from withholding. And you want to make sure that each withholding certificate must have a valid Taxpayer Identification Number. And you can refer to Form W-7 on how to apply for one, if the NRA don't have a taxpayer ID. For W-4 forms, they are special withholding rules for NRA employees, and because NRA generally are subject to higher withholding rate, compared to U.S. resident alien or citizens, and these special withholding rules are described in Chapter 9 of Publication 515 Withholding Taxes on Non-Resident Aliens. A non-resident alien should follow the special instructions in notice 1292, which is supplemental Form W-4 instructions for NRAs individuals. And as outlined in this slide and then properly complete the Form W-4 to make sure proper amount of withholding. And remember, any under withholding of tax during the year may result in an underpayment penalty later. For Form 8843, which is an information return statement that is filed annually by nonresident alien students and scholars in F, J, M or Q visa status, who have the presence in the U.S. And this form shows that an individual is an exempt from counting days of presence in the U.S. Remember all NRA with F, J, M or Q visas are required to file the Form 8843 annually to claim, exempt individual, status. Even if they are not receiving any U.S. source income for the year, and therefore have no 1040-NR filing requirement. And this form must be submitted, even if the visa holder does not have a social security number or ITIN As far as the filing requiring for 1040-NR, generally the NRA must file the return, if they were engaged in the U.S. trade or business during the year, even if they don't have income - if they received no income from the trade or business or no U.S. source income, or even if the income is exempt from U.S. tax under an applicable tax treaty or any section of the code. So basically, anytime NRA is engaged in a U.S. trade or business. Whether or not there is any income to report they will have to file 1040-NR. And they also have to file 1040-NR if they were not engaged in a US trade or business but received income from US sources that is not considered effectively connected income and reportable on Schedule NEC and not all of the tax was withheld from that income. And additionally, the NRA 1040-NR filing requirement includes if the NRAs described above is a deceased person, a representative, or an agent responsible for the NRA will need to file a return. And if there is an estate or trust of an NRA described above, the fiduciary of that estate or trust will have to file the return also. And finally, for those NRAs who want to claim the benefit of any deductions or exemptions and/or want to claim the refund for any over withholding of tax will need to file a return in order to get a refund. And by the way, I'd like to mention that for the tax return payers starting tax year 2020, the return preparer must generally e-file the 1040-NR unless filing for a dual status taxpayer, a fiscal-year taxpayer, a trust or an estate. You can review the IRS notice 2020-70 for details in the exceptions of this e-filing requirement. And this slide details that due date for the 1040-NR and generally a timely file return for an NRA is due on June 15 following the close of the year. However, it is important to know to note that if the NRA receives W-2 wages as an employee, that is subject to Chapter 24 withholding, the 1040-NR is still on April 15, the same as that all as 1040 filers.

And just like a U.S. person filing Form 1040, the NRA filing 1040-NR may extend their return filing due date by submitting Form 4868 for an automatic six month extension. If an NRA is required to file a U.S. tax form or an income tax return, but fail to do so, such person may possibly face negatively consequences. And this slide outlines the possible consequences. For Form 8843, while there is no mandatory penalties for failure to file, it could still affect the issuing of future U.S. visa or granting of legal permanent lifetime status. So there is still need to file Form 8843 to make sure they comply with visa immigration rules. For not timely filing 1040-NR, the consequence could include: late file penalties, including failure to file and failure to pay and subject to additional penalties on balance due and accumulated interest. If taxpayer was subject to over withholding, filing late will delay the tax refund, and if filed past the statutory refund date, may end up losing the refund altogether. IRS may also issue substitute for return for the non-filer, compute tax based on the income only, which could result in higher taxes due for these individuals. And finally, like with the Form 8843 for NRA individual filing requirements, failure to file a required Form 1040-NR may affect the issuing of future U.S. visa or granting of legal, permanent residence status. So it's important to make sure that NRAs fulfill their U.S. tax filing requirements. Okay, Rich. Now, this seems like a good time for another polling questions. Richard Furlong: It is indeed. Thank you, Henry. So this one is tricky. So let's put on our thinking caps. Nonresident alien students and scholars are not required to file the Form 1040-NR, if his or her only income for the year is: A, non-qualified scholarship or fellowship grant. B, income exempt from tax under the terms of an income tax treaty. C, interest income from personal savings account at a U.S. bank or D, none of the above. Again, NRA students and scholars are not required to file the Form 1040-NR, if their only income for the year is: A, a non-qualified scholarship or fellowship grant. B, income exempt from tax under the terms of an income tax treaty. C, interest income from personal savings account at a U.S. bank. D, none of the above. So we're focusing on whether or not there's a filing requirement for a particular type of income or if there not a filing requirement for a particular type of income? So I'm going to give you a moment or two to make your selection. And now we'll stop the polling. And on our next slide let us share the correct response which is C, interest income from personal savings account at a U.S. bank does not trigger a filing requirement for a nonresident alien. So this was challenging Henry only 27% less than a third of our attendees got this correct. So maybe a U.S. bank would include U.S. banks, U.S. savings and loan institution, a U.S. credit union or a U.S. insurance company if their only income was from one of those sources. Then they would not have to file the 1040-NR. So do you want to expand on that a moment Henry, before I turn it back to Jim, James. Henry Dong: Sure. Yes, kind of briefly emphasize that for NRAs taxpayers in this question that the interest income qualifies for the portfolio interest exemption meaning the type of interest income from personal savings account of a U.S. bank is tax free for NRA taxpayer and it not only applies to student scholars and may apply to all NRA taxpayers, that if their income is from U.S. saving and is passive interest income that qualifies for an exemption because it is this investment type income as from the U.S. bank, U.S. savings along with U.S. insurance company, as we discussed early in our presentation. And the first two choices are incorrect, because non-qualified scholarship are taxable.

Only the qualified scholarship is tax free. So, and the income exempt from tax under the terms of an income tax treaty is a reported event even if there is no tax due on the tax return, because they would, for this type of income, the payors will issue 1042-S visa exemption form that they will need to report the tax exempt income on 1040-NR in this instance. Back to you Richard. Richard Furlong: Okay. Thank you, Henry. And just as a teaser in two weeks from today, we're going to have another webinar on Claiming Tax Treaty Benefits for Nonresident Alien Individuals so you may want to attend. So now we've reached the point that I'm looking forward to where James is going to walk us through an extremely comprehensive example that will bring together many of the concepts that both he and Henry are discussing today. So James, let me turn it over to you to tee up the example. James Kwong: Okay, great. Thank you, Rich. Thanks, Henry for your portion of this presentation. So let's go through this example of how to properly complete a Form 1040-NR on income item that many NRA students and scholars may receive during their temporary stay in the U.S. So all of you should have received a copy of the slide deck this morning. So if you had printed out the deck or have a second monitor, I really suggest that you keep these two facts slides in front of you as it will be easier to follow this example. So there's going to be two facts slides and one that you have right in front of you. And then there'll be the next slide have those available. So be easy to follow through our screenshots of the 1040-NR. Okay, so let's go through the facts. So here we have an NRA, who is a resident of China attending graduate school in the U.S. on an F-1 student visa in September of 2018. She had received the following year in tax forms, she had received the Form W-2 for a campus job for $20,000 in wages, in which she had $2,500 of federal taxes withheld and $800 in state tax withheld. She also received the W-2 for a summer internship in which she had received $10,000 in wages, of which $1,700 was federal taxes withheld upon and $400 in state taxes. She also received the Form 1042-S and the amount of $5,000. And the income code was 20 and that code is compensation during studying and training. And then there's also an exemption code of 04 on that 1042-S and again, that exemption code is the exempt under a tax treaty code. She also received the 1042-S in the form of a dividend for $500, in which $150 of federal taxes were withheld upon. And continuing on to the second slide of this example, the fact slide which she had also received more forms another 1042-S and that was for $1,000 for winning a music competition in which $300 of federal taxes were withheld. And then she also received a $300 state income tax refund via 1099-G also had a 1099-INT for $200 and else for a savings account at a U.S. Bank. She also received $20,000 in qualified scholarship grants and then also had some expenses and that's $800 in cash contributions to qualified U.S. charities and then also had incurred $1,000 of unreimbursed employee business expenses during that summer internship. Okay, so let's start on Page 1 of the 1040-NR as you can see here, Page 1 of the 1040-NR comprises of amount that are of income that's effectively connected with the U.S. trader business. So based on the facts provided the NRA was issued two W-2s and those total amount in $30,000 of wages. So as previously stated, taxable wages as an employee that is considered ECI and generally issued on a W-2. So therefore going to be reported on line one of Form 1040-NR. Again, line one on Page 1 is the income effectively connected with the U.S. trader business. Therefore we'll have the $30,000 on line 1A. The scholarship income recalling our facts slide she had received $20,000. But it was for a qualified scholarship. So as Henry had discussed earlier, qualified scholarships are non-taxable under Section 117. So therefore, it's not going to be reported on the 1040-NR at all. As you can see on line 1B that is a line for any taxable scholarship and fellowship grants. So therefore, you're not going to see anything on this line 1B due to its non-tax ability. The taxpayer was not issued a 1042-S, as you can see on the fact slide, because most likely the university was provided the right documentation, and they were not required to report or withhold tax due to this non-tax ability. Moving down the form, we have line 1C, and as you can see here, we do have income on there of $5,000 and that was for the amounts that were exempt by treaty, you do recall under the fact slide she had received at 1042-S and the amount of $5,000. And that was for income code 20 compensation during studying and training, but with an exemption code 4. Therefore it is on line 1C and therefore not going to be part of the computation of income that would be taxable. And as you will see later on schedule OI the taxpayer would ought would be claiming article 20-C of the treaty with China, and that is the students and trainees article. And if you do have time, you can look up that article we do to have tax treaty articles available on irs.gov. And you would see that the article exempts up to $5,000 of income from personal services performed. So in this case, the taxpayer probably had provided the payer a completed 8233 to the employer. In this case, the employer hadn't verified its correctness and then issued that 1042-S for that exempt amount of the $5,000. It properly coated it income code 20 and also properly coded exemption code 4. And as we previously discussed, Henry had talked about section 871(h) and that's for that interest income from U.S. banks, and that was part of the most recent polling question. So that is not considered ECI and therefore is not taxable. So again, NRAs under 871(h), they're not taxed on interest income from a U.S. bank account. Therefore, you're not going to see anything on either line 2B of Page 1 here, which is the interest line. And you're not going to even see it on schedule NEC, and that is for the non-ECI type items since it is non-taxable. Okay, so next we want to look at Line 8, and that is the amount of $300 and that art that total is coming from schedule one, which is the additional income and adjustments to income line. If you do notice, the 1040-NR for the year 2020 is completely different from the 2019. The 1040-NR for 2020 has now follow the same format of the Form 1040, which is a more concise Page 1 and 2 with the supplemental schedules, and the 1040-NR does use those same supplemental schedules that the 1040 uses. So let's go to that schedule, schedule one, and we'll look at the breakdown of this $300.

And in this case, it's pretty easy. It's just one item and that is the state income tax refund from that 1099-G, which is taxable in this case, because in this example, we are assuming in the prior year the taxpayer did take a deductions for state taxes and got the benefit for the deduction. Therefore any refunds would be taxable to this individual. So that is the $300 coming from schedule one onto that line eight. So now we go back to Page 1 of the 1040-NR so you do see that we have totals of the tubby two wages properly reported on line 1A any income exempt by an income tax treaty was reported on line 1C, from there will be at a $300 from schedule one. And now you'll see a total ECI amount of 30,300 on line 9. So we covered the W-2 income, we've covered the exempt income of the $5,000 from the 1042-S. We've also addressed the 1099-G state tax refund from schedule one. And we addressed the 1099-INT received for that $200 in interest income, which was non-taxable. And we also had a trust that $20,000 in qualified scholarship grants not going to see this on the 1040-NR due to its non-taxability under Section 117. Okay, so let's move on to line 12. And that's where you see that we have $2,000 in itemized deductions from schedule A. So let's go over to schedule A of the 1040-NR. And here's a snapshot. You will notice on the snapshots schedule A imprints Form 1040-NR, that is a different schedule A from the 1040 version, though schedule A Form 1040-NR is different because as we previously discussed.

NRAs can only deduct certain itemized deductions, they can't deduct all the same items, itemized deductions that U.S. persons can deduct, therefore the schedule A different. So in this example, we had two W-2s and they also had both in which they had some state income taxes withheld. And that total amounts were $1,200. And you can see here reflected on line 1. We also have cash gifts that U.S. qualified charities of the $800 from the fact slide, so that is deductible since it was made to qualified U.S. charities reflected on line 2. And if you do recall that the employee also has some unreimbursed employee business expenses of $1,000. Well, that is no longer deductible on schedule A for the year due to the tax law changes that the Tax Cuts and Jobs Act had enacted, they have suspended and reimbursed employee business expenses, up until I believe the end of 2025. So, in that case, therefore, you're not going to see any of that $1,000 on Schedule A, so we do have a total itemized deductions of $2,000, that will carry over to Line 12 of the 1040-NR as you have previously seen, so taking into account the $2,000 of itemized deductions, subtracting it out from effectively connect income (ECI) of the 30,300, you will have taxable income of $28,300 as shown on line 1040-NR. So when you look at Page 1 of this 1040-NR, you do see that amount of $28,300. Okay, so that wraps up Page 1 of the 1040-NR, so we've covered all ECI items, let's move on to Page 2 and that is starting with Line 16X, so here's that snapshot of Page 2. So we do use the tax tables in the instructions of the 1040-NR and we have tax of 3202 on the taxpayers taxable income. So to recap ECI, add some graduated rates on a net basis. So as you can see, total all of the NRAs ECI on Page 1, we took deductions that were connected with the ECI on Page 1 and we use the tax tables to calculate the tax at graduated rates. So moving down to Line 23A, you can see here we are showing the tax of $350 on the taxpayers non-ECI income. Again, U.S. source FDAP that is not considered ECI is generally taxed on a gross basis, meaning deductions are not allowed. And it's taxed at a 30% rate unless eliminated or reduced by a treaty. So therefore, that's why you can see that this amount of $350 this line item is after the tax on ECI because cannot take deductions against this type of income. So let's take a look at Schedule NEC, in which we would see how the non-ECI FDAP was calculated. So here's the NEC. So in the example, the NRA had received a dividend from a U.S.

Corporation, and that amount was $500. So in this case, it was not considered ECI, and therefore should be reported on the schedule. Since the taxpayer was a resident of China, you do have to check the China U.S. income tax treaty to see if that dividend qualifies for any reduced rate. So when you do look at the treaty, the treaty does in fact state that dividends do qualified for a reduced rate of 10% under the Dividends article. In the Dividends Article of the U.S. China Treaty, they said it is taxed at a reduced rate. So therefore you have a $50 tax on that dividend income as you can see in the 10% column of Line 14, so there's different columns to get the 10%. And there's also a 15% because those are the more common reduced rates for most of the treaties. So therefore, you'll see the $50 on the 10% column on Line 14. And you can also see on the schedule that there's $1,000 of prize money that this NRA won for the music competition winnings, if you remember on that recall on that slide, they did have received $1,000 for winning a music competition. So as Henry had discussed, prizes and awards earned by NRAs are generally considered non-ECI FDAP and they're subject to a 30% tax. But as you can see here, the 30% tax is reflected on Line 14, Column C, if you total all the taxes on NEC, and that's on Line 15 and that total of that $350 that we saw, that carries over back to Page 2 of the 1040-NR Line 23. So back to Page 2 over here and so after we total the tax on Line 22, that is the tax on the ECI amounts, we also add the tax of the NEC stuff on non-ECI FDAP, you got a total tax now $3,552 Line 24, we take into account the withholding amounts on from the W-2s and 1042-S's for a total amount of $4,650 and that will give this taxpayer a refund of $1,098. So the only thing left now to fill out for this return is the information on Schedule OI. So as you can see here, this is the various information that is needed to complete this form. The 1040-NR it does have this required form. It's a Schedule OI. And as you can see here, we are showing China with Country of residence on Item B, we have the F1 visa status on Item E. We also want to note that there are no dates entered in Item G, since a taxpayer did not enter or leave the U.S. during the entire 2020 tax year. You look at Item H here, you can see that there are boxes to put the number of days that this individual was in the U.S. over the last three years and if you recall during our residency discussion, this is for helping calculate for the purposes of the substantial presence test. But in this case, it doesn't matter since as previously stated, the taxpayer is an exempt individual and therefore does not need to count days of presence in the U.S. for purposes of the SPT. And moving down to OI and we do see Item L here. And this is where the taxpayer is claiming the $5,000 exemption of the personal services income due to the China U.S. Treaty. You could see on here on Column A, we'd have the country filled out for China, the Treaty Article of 20 (c) and that is the Students and Trainees article that is noted in Column B. And you can see the amount of the income exempt in Column D and that is $5,000 and that will tie to Line 1c of Page 1 of the 1040-NR. So that wraps up this example and presentation. So let's do a final polling question, Rich. Richard Furlong: Yes, thank you, James. We can do that. So here audiences our fifth and final polling question, which of the following four statements is true? A, a non-resident alien J-1 visitor, visitors are never exempt from FICA tax. But some students and scholars in F-1 visa status are exempt or B, taxable scholarship or fellowship grants paid to F-1, J-1 M-1 or Q-1 visa status recipients are generally subject to a reduced 14% withholding tax or C Form W-8BEN should be used when claiming an exemption from withholding on wages or D, students with F, J or M visa may exclude days of presence in the U.S. from counting towards the substantial presence test for a minimum of two calendar years. So which of these four following statements are true? Let me read them again. A, a non-resident alien J-1 visitors are never exempt from FICA tax. But some students and scholars in F-1 visa status are exempt or B taxable scholarship or fellowship grants paid to F-1, J-1, M-1, or Q-1 visa status recipients are generally subject to a reduced 14% withholding tax, C, Form W-8BEN should be used when claiming an exemption from withholding on wages or D, students with an F, J or M visa may exclude days of presence in the U.S. from counting towards the substantial presence test for a maximum of two calendar years. So we ask that you take a moment and then make your selection by clicking the radio button that best answers the question. And I'll give you a few more seconds to make your selection. Okay, we'll stop the polling. And we'll tee up the correct response. On our next slide, which is B the correct response is B, taxable scholarships or fellowship grants paid to F-1, J-1, M-1, or Q-1 visa status recipients are generally subject to that reduced rate at a 14% withholding tax. So James, this was another challenging question. Only 29% of our attendees, a little less than a third got B correct. So maybe we can go over just briefly, James. A is not correct, because J-1 visas visitors may be exempt from FICA tax. James Kwong: Correct. Henry did state on one of the slides that NRA students and scholars in F-1 status, J-1 as well, M and Q, they are exempt from FICA tax under the code and then for item, go ahead. Richard Furlong: Go ahead, James. Go ahead for C. James Kwong: Item C, that is not correct because a taxpayer would use an 8233 when claiming exemption from withholding on wages. The Form W-8BEN is for all other payments, the most typical one for foreign students and scholars would be for scholarships. So they're going to be claiming an exemption from withholding on say, qualified scholarship or a scholarship that's exempt from tax due to a treaty, they would use the Form W-8BEN, a 8233 again would be used for withholding on compensation or wages in this case. And then the final one, students with F, J or M visa may exclude days of present maximum of two calendar years. That's incorrect, because the correct answer would be five calendar years for students. Richard Furlong: Very good. Thank you very much for that clarification, James. So let me let me continue before we get into our Q&;A with some of the resources that may be helpful to our audience. James Kwong: Absolutely. So this is a slide that lists all the publications that are very relevant to NRA individuals or NRAs and publications 519. That is the go to publication for most questions, a lot of the material covered in this webinar is reflected in publication 519 as well as publication 515 for the withholding side on NRAs another popular publication that's really helpful for the foreign student and scholar guide is publication 4011. And then irs.gov, as always has very good topics on international taxes. So you can always do a keyword search in irs.gov. And then, as always, the 1040-NR instructions give a lot of practical resources and answers to most 1040 or most NRA type questions for individuals. We also added the 1040 instructions on here as well, because as we stated earlier, the 1040-NR is really mirroring the 1040 now in a lot of the instructions, a lot of line items and the instructions of the 1040-NR will refer one to the 1040 instructions, just to save more space as far as paper. So if you do prepare a 1040-NR, you'll probably need the 1040 instructions in front of you as well. Richard Furlong: Thank you, James. Thank you very much.

Great resources. So again, my name is Richard Furlong, and I'll be moderating our Q&;A session.

But before we begin the Q&;A session, I want to extend a sincere thanks to everyone for attending today's presentation on the U.S. Taxation of Foreign Students and Scholars. So as I mentioned at the outset today, we want to know what your questions are for our presenters. And here is your opportunity. So if you haven't already input your question, there's still time to do so. Go ahead and click on the drop down arrow next to the ask question field, type in a succinct and on-point question for our presenters, and then click Send. And we're very fortunate that James and Henry will be staying on with us and answer as many questions as possible. However, before we get going, I've already seen quite a number of questions coming in. So we're not going to have time to answer all of the questions submitted today. But I assure you, we will answer as many as time allows. And remember, if you're participating in today's webinar to earn a certificate, and related continuing education credit that you will qualify for one credit by participating for at least 50 minutes from the official start time of the webinar. And you'll qualify for two credits by participating for at least 100 minutes from the official start time of the webinar. So that means the few minutes I spent chatting before the top of the hour, that does not count towards the 50 or 100 minutes. So James and Henry, let's get underway. And let's get to many of these questions. Some very interesting questions coming in here. And, James, I want to start with you for a very broad question. Maybe too broad, but I want to tee it up for you, James. Which visas must file a U.S. tax return? James Kwong: Which visas must file a tax return? Rich, we do actually get this question a lot. We've done some we've done a number of speaking events. And this question comes up very often. And this has been reiterated earlier in this session. Visa status really has no bearing on the type of U.S. tax return and individual must file. You really have to look at the residency rules for that individual such as the substantial presence status and we cover that extensively today. So it's really not the visa that determines what type of tax return is, you got to look at two things, you got to determine first of all, what is the residency of this individual? Is this person considered an NRA or resident alien? So the resident alien, you have to file a 1040. If it's an NRA, then you know, you have to file a 1040-NR, that's or those are the returns that need to be filed. So once you figure out whether or not an individual is an RA or an NRA, you will have to find out the tax return that needs to be filed.

And then you have to look at the filing requirements for that individual tax return. So sticking with the NRA status of the individual is considered an NRA for U.S. tax purposes after applying the residency rules, then you know a 1040-NR is the return to file and then you have to look at the filing requirements of that NRA. And as Henry had stated earlier during this presentation, an NRA would need to file a 1040-R if they have a U.S. trade or business in the U.S., or a U.S.

sourced income that was not fully withheld upon. So again, the type of visa does not dictate whether or not there is a tax return filing obligation is whether or not there is income earned or there is a U.S. trade or business of that NRA basically, you have to look at residency and the filing obligations for that individual tax return type. Richard Furlong: Well, thank you, James.

And there was a couple, there were a couple of questions coming in on asking about the 1040-NR or the 1040 for those students in visa F or J status, and I think you just touched on that. So if they're still considered an exempt individual under an F or J student, then we would be looking if there is a filing requirement change at the 1040-NR. But if they go into that sixth year, and you've counted the days and they meet the substantial presence test, then if I understand you correctly, James, it would be a 1040 filing requirement. James Kwong: Correct. And again, you just you have to look at the residency rules, it doesn't really matter. It does matter in many cases, if the visa actually changes, because we had discussed previously that certain visas do affect the tax rules. But again, you have to look at the residency rules. And then you have to look at the filing obligations right after that. Richard Furlong: And again, there's a great discussion in that Publication 519 that James just referenced. So Henry, let me turn to you. And here we have a question maybe coming in from the Southwest area of the country. Daily commuters from Mexico, they've had an F-1 visa, F visa, I should say for over five years. Are they now eligible Henry to file as a U.S. resident, but they're daily commuters in and out of the United States and they had an F visa for over five years, are they eligible to file as a U.S. resident? Henry Dong: Okay, Rich, I think this kind type of question is one James discusses and this particular question is mostly related to the applicability of their substantial presence test. And as we know for counting days. So, the question is that after five years, do those commuter days count and the answer is no because this question is talking about commuters that come to the U.S. to study or work.

So the income earned here will be treaded as U.S. source income and taxed as a non-resident alien because they only count days that they are here for over 24 hours.

They just commute to study or work and at the end of the day return. So in these instances, they should file 1040-NR, not 1040. Richard Furlong: Very good. Very good, thank you.

So the key here is commuting, it doesn't count towards the substantial presence test. Now Henry, you discuss the situation in which for F or J visa holders, their wage income may not be subject to Social Security or Medicare Tax as we know it FICA tax, but what about those situations where the employer withheld the tax, how can the student get that withholding tax back from the employer? Henry Dong: Okay, on this question I think we actually covered the topic during our presentation. Remember that the foreign students and scholars under specific F-1, J-1, Q-1 or M-1 visa categories, they may be in some exempt from FICA taxes if the employee provides information upfront, the employer usually will not withhold FICA taxes. But sometimes the employer either was not aware of the taxpayer's visa status or does not have sufficient information and therefore they withhold that FICA tax anyway. And if this happens, then employees should contact the employer first and provide supporting documentation and request a refund. And if they tried that first and was not able to get the refund from an employer, then the other option is to, I mean what you say the second option, always go to an employer first to give you the refund, if the employer does not give the refund then you should file the claim for refund Form 843 and Form 8316 along with that supporting documentations as we discussed during the presentation, and submit that request to IRS for a refund. Richard Furlong: Right. And again that Publication 519, which I took a look at for today's webinar has a great discussion on filing that Form 843 if the FICA tax was erroneous withheld along with that. And you alluded to it, Henry, in your remarks the Form 8316. So thank you for that. So you can follow up audience in the Publication 519. James, let me turn to you on income, on wages that are U.S. source income that are exempt from tax, but the Form 8233 was not provided to the payer, the employer? Can that non-resident alien still get the exemption from tax on those wages when they file their 1040-NR James? James Kwong: Okay, so the question is if Form 8233 was not provided to the payer, so therefore, they do not get exemption from withholding, but can the taxpayers still get the benefit because an exemption from tax on those wages. Is that correct? Richard Furlong: Exactly, that's the question. James Kwong: Okay. Very good. Okay. That's actually a very common question. It does happen very often. And the 1040-NR instructions actually address this issue perfectly. But obviously, we're going to go through the answer right now. So the answer is, yes. So the purpose of the Form 8233 is for the NRA to basically claim an exemption of income tax withholding. The withholding portion due to the income tax free benefit, it is not used to claim the benefit itself from not being taxed, it's just being able to keep the money and not being withheld upon on that so. So even though unfortunately, if an NRA forgets to file the Form 8233, that individual gets withheld upon, that individual still to claim the benefit, it would just have to report that information on the 1040-NR and get a refund from that.

So again, so let's go through this in a little more detail. So let's just say that we have a situation where the 8233 was not provided to the employer, but the end rate did qualify for a benefit. So again, it does not prevent an NRA from claiming the exemption of wages on the 1040-NR, they just won't get the benefit of it not being withheld upon. So since 8233 was not provided, the employer would have withheld tax on the wages and issued a Form W-2 instead. So in this case, so you have an issue here because you have a Form W-2, which show that would be taxable. So in this case, and this again, in the instructions, the 1040-NR, the NRA would still reduce the wages on line 1A of the return. So save you have $100,000 of wages, but $5,000 of it should have been excludable or are exempt, but that W-2 shows $100,000 that NRA filing the return would reduce the amount to $95,000 on line 1A. They will report the $5,000 exempt amounts on line 1C, which is that exempt by treaty line and then complete schedule OI that item L we showed that in the comprehensive example. So by doing that, you have a mismatch, you have a W-2 that now that does not tie to line 1A. What the NRA needs to do in addition to reducing the amount they have to attach a statement to the return which would contain all the information that would have been required on a Form 8233 to explain his or her eligibility for the exemption. So in other words, basically just fill out the 8233, attach it to the 1040-NR and that would explain why the wages are reduced by that amount, and therefore they can claim the exemption from wages and then get a refund of those taxes that were withheld. Richard Furlong: Very good. good. James Kwong: That's a good answer there. And again, 1040-NR instructions have this exact example on there so. Richard Furlong: And remember, this was mentioned by Henry the 1040-NR is now enabled for electronic filing. So James, that statement you just referred to in the situation could be attached to an electronic file if the software being used allows that, otherwise, it would have to be the 1040-NR would have to be mailed to the internal revenue service. And speaking of 1040s and 1040-NRs. Henry, let me toss this question to you. This is what I've seen, I used to be involved in our VITA program, our Volunteer Income Tax Program, where F1 students will come in for the current year, but when we looked at their prior year return it was a 1040. They might have used commercial off the shelf software to file a 1040 as the incorrect form Henry, how could they correct that in the current year for the prior year, they should have filed a 1040-NR, but filed the 1040. Henry? Henry Dong: I'm sorry, I was on mute. Yes, and I just you mentioned that I do participate in some VITA program during the tax filing season too, and I do see similar situations with non resident aliens that come to the volunteer site and filed a 1040 return, and that sometimes they did that because the preparer did it and did not know, they did not provide information. So the bottom line is that either preparer or the taxpayer as soon as they notice that they've made a mistake, then they should file an amended tax return with the service. So basically, you file 1040-X and attach the correct 1040-NR and follow the procedures that you find in the instructions.

And it's very important to correct it because you need to provide correct data to be in tax compliance because it could impact your immigration status and you need to be in compliance with your tax regulations and tax due and you do this by filing the 1040-X amended return, then we are able to fix the problem and you can again use the 1040-X instructions for where and how to file those amended returns. Richard Furlong: Very good. Thank you, Henry. And very important point you just made during your discussion is that the non-resident students and scholars want to be in compliance with their filing and paying of U.S. taxes because it could impact on their immigration status going forward. James, we've also seen instances where the visa status changes at some point where perhaps an F1 student goes to H1-B in the current year. Are there any general guidance you can provide them whether they file as a resident or non-resident, if the visa status changes from F1 to H1-B and the current year James? James Kwong: And again, this goes back to the first question that was asked in regards to visa status. Again, visa status really has no bearing on filing obligation, whether or not that individual has to file as a resident or non-resident alien. So again, switching from an F1 visa to an H1-B visa, it wouldn't change anything, you just have to look at the residency, does that individual pass a substantial presence test, you get to look at presence there, is that person a Green Card holder then so it's really again applying the residency rules in determining whether or not that individual is considered RA resident alien or a non-resident alien for tax purposes. Richard Furlong: And when you discuss the substantial presence test in the counting of the days and the weeks or the exemption, an H1-B visa holder as I understand it, James must start counting those days of presence in the U.S. While the F1 student depending on they've been here less than five years are exempt from counting those days towards the SPT. James Kwong: That is correct. The change between F1, H1-B would not determine the residency, you would have to look at the tax residency rules, the U.S. rules and rights natural presence has in that case, correct. Richard Furlong: So, Henry, here's a very timely question in light of the pandemic over the past 18 months. And I think we've learned a couple of questions on this theme were due to COVID-19, some F1 graduate students had to return to their home country, and then perform their work for their graduate assistant's positions outside of the U.S. So they're earning income outside of the U.S. because they're back in their home country as an F1 graduate student, is that income taxable on there for U.S.

purposes, Henry? Henry Dong: Yes, this is the kind of good question actually, and I know that in one of our polling question, we did have a similar question about people working outside of the country and what is taxable. So in this instances, the key is to look at the source of income and we did have a general kind of overview during the presentation in an earlier section, for that, we're talking about compensation for service here, right. So in this case, taxpayer, even though he was paid by the university, because of COVID the student had to return to their home country and were not able to come back. And so in many instances, the university allowed them to work remotely in their home country. So because the taxpayer is physically in his home country outside the U.S., this type of income will be considered as a foreign source income, not a U.S. source income, so that income is not subject to U.S. tax, and the U.S. employer in this case, the university, will then issue the W-2, the W-2 issued by the university should only include those portions of income for the work done in the U.S. and not the income that was made outside of U.S. So the university should separate that income between the U.S. source versus foreign source income. And in some instances, I've noticed that sometimes university might just report all the income for the year for that taxpayer on one W-2 If that's the case, like I mentioned earlier the student could ask the university to amend the W-2s and fix that error. So in most instances, the university will be correct that. Richard Furlong: Thank you very much, Henry. Unfortunately, audience that's all the time we have today for questions. I want to extend a very sincere and enthusiastic thanks to both James and Henry for sharing their considerable knowledge and expertise and answering some of your questions today. Now before we close out the Q&;A session, I'd like to ask Henry to summarize the key points that you would like our attendees to remember from today's webinar. Henry. Henry Dong: Okay, thanks. So in today's session, we cover a wide variety of topics on federal tax rules related to foreign students and scholars. And also we can see from our polling questions that the tax issues in these areas are complex especially for those who are not familiar with the NRA taxation issues. So hopefully, with today's presentation, what you can take away is that most foreign students and scholars on U.S. F, J, M or Q visas are considered exempt individuals to exclude days of presence in U.S. for certain periods for purpose of the substantial presence test. And therefore most of them are nonresident aliens for U.S. tax purpose and file 1040-NR tax return not Form 1040 because the tax requirement for NRA versus U.S. person is different. And like other nonresident aliens, the NRA students are subject to U.S. taxation on their U.S. source FDAP income and income effectively connected with a U.S. trade or business. And we also mentioned about some special tax exemptions available to NRA students and scholars such as exemption from taxes when wages are paid by foreign employers. And we also talked about the exemption on social security taxes. And the other important thing to remember is that some tax treaties have a student or trainee article and teacher or research article that exempt certain income from U.S. taxation.

And NRA students and scholars on again on a F, J, M or Q visas do have U.S. tax filing requirements. And for those who have no reportable U.S. income for the year, and therefore may not have a 1040 filing requirement, they may still be required to file Form 8843 annually. And the form is pretty much mandatory for those individuals claiming the exempt status to exclude days of presence in the U.S.

for purpose of substantial presence test. That's pretty much some of the key points for you to take away. Back to you Rich. Richard Furlong: Thank you very much, Henry for sharing that information. So audience, we here at the IRS are planning additional webinars throughout the year. To register for any of our upcoming webinars, please visit irs.gov and use the keyword search webinars. And then either webinars for tax practitioners or webinars for small businesses. And when appropriate, we will be offering certificates and CE-Credit for upcoming webinars. We also invite you to visit our video portal at www.irsvideos.gov and there you can view archived versions of our webinars.

However, continuing education credits or certificates of completion are not offered. If you view an archived version of any of our webinars on the IRS video portal. Again, a very big thank you to both James and Henry for a terrific webinar today and for sharing their experience and expertise with us and also for staying on to answer your questions. I also want to thank your attendees for attending today's webinar on the topic of U.S. Taxation of Foreign Students and Scholars. Now if you attended today's webinar for at least 100 minutes after the official start time, you will receive a certificate of completion that you can use with your credentialing organization for two possible CPE credits. If you stayed on for at least 50 minutes from the official start time of the webinar, you will qualify for one possible CPE credit. Again, the time we spent chatting before the webinar does not count towards those 50 or 100 minutes. And if you're eligible for continuing education, or CE from the Internal Revenue Service, and you registered with your valid PTIN your credit will be posted to your PTIN account. Now if you qualify and have not received your certificate or credit by November 4, please email us at the email address you see on the slide and I'll read it to you cl.sl.web.conference.team@irs.gov And if you're interested in finding out who is your local stakeholder liaison, you may send us an email at the address shown above on the slide, and we will send you that contact information.

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