Foreign students come to the U.S. for full-time study under the F-1 visa. In order to qualify for the visa, they must first apply to an authorized educational institution, which can include any private elementary or secondary school, community or junior college, university or language institute. Once they apply to that institution and are accepted the institution emits an I-20 form, which authorizes them to study there, and the foreign nationals then apply for a student visa at a U.S. embassy or consulate in their home country. In order to qualify for the visa, the student must show the financial resources to cover all tuition and housing costs and also must show sufficient ties to home country, in order to avoid having their visa denied (F-1 visa denials have sharply risen under the Trump administration).
Assuming the students receive their visas they can then travel to the U.S. up to 30 days before their study start date. Once in the U.S., F-1 visa holders are deemed to be non–resident aliens (NRAs) for the first 5 years. They are generally treated as NRAs living outside the U.S., except with respect to capital gains. Students who spend more than 183 days in the U.S. in any year are subject to capital gains taxes on all capital gains (U.S. and foreign source capital gains) at a rate of 30% (or lower treaty rate).*
There is a requirement that the student must comply substantially with the applicable visa requirements, which means enrollment in a full-time course of study.**
These individuals file Form 1040NR U.S. Nonresident Alien Income Tax Return, if there is an income tax filing requirement, and/or Form 8843 Statement for Exempt Individuals and Individuals With a Medical Condition if an income tax return is not required.
For students enrolled in university programs which require that practical training be obtained before graduation, F-1 students can work under the Curricular Practical Training (“CPT”) program, and earn money. Similarly, once a student receives their degree they are eligible for one year of Optional Practical Training (“OPT”). This period can be up to three years if they have a U.S. degree in a STEM field (Science, Technology, Engineering or Mathematics). Once a student is actually working under an OPT status, he/she would still be deemed a NRA and to have a tax home in the U.S. for capital gains purposes, meaning he/she would have to pay U.S. income tax on all U.S. income. This is true as long as the OPT authorized period is valid. These individuals should file Form 1040NR U.S. Nonresident Alien Income Tax Return and Form 8843 Statement for Exempt Individuals and Individuals With a Medical Condition.
A person who stays over five years under a student visa is deemed to meet the substantial presence test, unless he/she can prove that he/she qualifies for the Closer Connection to a foreign country exception. (An individual has a closer connection to another country if he/she establishes that he/she maintains more significant contacts with the foreign country than with the United States.) The Treasury Regulations consider a number of factors in making this determination, including family connections, work, and business ties, affiliations with social and religious organizations, where an individual maintains a “permanent home” and keeps his/her personal belongings, voter registration and tax and residency documents, among other factors.
These individuals should file Form 1040NR U.S. Nonresident Alien Income Tax Return, if there is an income tax filing requirement and/or, Form 8840 Closer Connection Exception Statement for Aliens to avoid taxes and penalties. With this form, one would have to attach sufficient evidence and information of the closer connection.
Finally, many foreign students seek to continue their practical training and gain more work experience through the H-1B visa. H-1B petitions are filed on the first Monday in April (In 2019 on April 1) and the annual cap for petitions is usually met in the first week, making this a one-week window annually to submit petitions. Upon submission of a petition, an F-1 OPT worker can have their OPT extended until the final adjudication of the petition, and if the petition is approved, OPT is extended until October 1st, which is when they change to H-1B status. H-1B status can be held for up to six years by the candidates, and they can transfer this status to other employers with a change of employer petition. If the H-1B petition is not ultimately approved, the F-1 student must leave the U.S. if their OPT time has expired.
These individuals should file Form 1040NR U.S. Nonresident Alien Income Tax Return or Form 1040 U.S. Individual Income Tax Return, depending on whether it is determined that he/she is a non-resident or resident alien. Tax residency of alien individuals is determined using the lawful permanent residence test (“green card”) or the substantial presence test.***
For any tax-related questions please contact Alicea Castellanos at email@example.com. For any immigration questions related to student or H-1B visas, please contact Steve Maggi at firstname.lastname@example.org.
*See IRS Code 871(a)(2) and 865(g)(1)(A)(i)(II))
**See Treas. Reg. §301.7701(b)-3
***See IRS code 7701(b)(1)
Contributions to this article made by Steve Maggi, Esq. Founder, SMA Law Firm – U.S. Immigration Attorneys
About the Author
Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high net worth families and their advisors. Alicea has more than 17 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm. Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.
Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S. Alicea is fluent in Spanish and has a working knowledge of Portuguese.
Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York City Bar, the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA) and the International Fiscal Association (IFA). She is the New York/Northeast Regional Representative of the Women of IFA Network (WIN). Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.
Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.