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As the international student population at colleges and universities continues to grow, it becomes increasingly important for schools and foreign students to become familiar with special tax rules and other filing requirements.

Educational Institutions Need to Understand Foreign Student Tax Filings and Reporting

  • 5/28/2013

Educational Institutions Need to Understand Foreign Student Tax Filings and Reporting

As the international student population at colleges and universities continues to grow, it becomes increasingly important for schools and foreign students to become familiar with special tax rules and other filing requirements. The laws and regulations are numerous and sometimes burdensome, but there can be consequences for both parties when obligations are not met in an accurate and timely manner.

Every institution should provide foreign students with timely recommendations and instructions on U.S. tax laws, filing requirements, and other compliance matters. To gain a basic understanding of the scope and complexity of the tax laws, institutions and students should understand how international students are treated for U.S. tax purposes. This will include details about annual tax filing requirements and the time period they can remain nonresidents.

As a starting point, students and administrators can visit the IRS’ foreign students page. But as the foreign student population grows, it may become necessary to establish an international student services department and/or engage outside professionals to ensure full compliance with tax laws.

Treatment of U.S. income

Like domestic students, foreign students generally pay taxes on U.S. income (i.e., income earned while in the United States). In general, foreign students must file a U.S. tax return when:

  • They receive scholarships, grants, and/or fellowships in excess of tuition, fees, and qualified educational expenses
  • Income is exempt from tax pursuant to terms of a tax treaty
  • Income is earned and U.S. sourced

Foreign students generally do not need to file a U.S. tax return when:

  • Income is from non-U.S. sources
  • Interest income is earned from U.S. banks and credit unions
  • They receive scholarships, grants, or fellowships that do not exceed tuition, fees, and qualified educational expenses

Foreign students who wish to retain their nonresident status for U.S. tax purposes should file an annual statement with the IRS using Form 8843.

Limited work permits

Foreign students generally study in the United States under an F-1 (academic students) or M-1 (vocational students) visa issued by the U.S. Citizenship and Immigration Services (USCIS). These visas carry very strict rules and conditions under which the student can work while studying in this country. Employment under these visas is generally limited to the following categories:

  • On-campus employment
  • Optional practical training (OPT) (employment before or after studies are completed)
  • Curricular practical training (CPT) (related to the student’s studies)
  • Severe economic hardship
  • Approved international organizations

Each of these categories contains requirements and restrictions related to employment, including limiting the amount of time a student can work off-campus. With the exception of the severe economic hardship category, off-campus employment is limited to work that is an integral part of the student’s degree program or for which students receive academic credit.

Foreign students qualifying for severe economic hardship and certain other students desiring off-campus employment must apply for an Employment Authorization Document (EAD) with the USCIS; however, foreign students must be careful not to jeopardize their F-1 or M-1 status. In addition, if a foreign student ceases to maintain valid F-1 or M-1 status, the EAD is automatically terminated. Foreign students who are not in compliance with these rules and regulations can face deportation and may be permanently banned from entering the United States. Employers can be subject to stiff civil and criminal penalties for knowingly hiring or continuing to employ unauthorized students from other countries.

Social Security taxes

Foreign students with F-1 or M-1 status are typically nonresident aliens, and as such, are exempt from Social Security withholding taxes on earnings for services rendered in this country. However, there is a cap on the number of years a foreign student can be exempt from paying Social Security taxes. If Social Security taxes are incorrectly withheld from a foreign student’s wages, there are procedures to claim a refund.

Institutional reporting requirements for scholarships and grants to foreign students

As noted earlier, scholarships, grants, or fellowships awarded to foreign students in excess of tuition, fees, and qualified educational expenses could require the awarding institution to withhold federal income tax. Grants or scholarships given for a foreign student’s room, board, travel, teaching, and research services are considered taxable. The institution must file a Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, for each foreign student that receives taxable scholarships, grants, or fellowships.

It has become increasingly important for institutions to assist foreign student populations in complying with these rules and regulations. At the same time, administrators must ensure that the school is in compliance with its filing and reporting obligations. Our growing economic and educational dependency means these issues are likely to need attention from institutions for years to come.