The tax system in the United States is complex due to its federal structure. There are three types of taxes that employee has to take of:
- Federal taxes
There are two important forms you will usually need to file as international student:
- Form 8843
Usually this form needs to be filed by EVERY international student (mainly F-1) regardless if they have income or not. The main purpose is to exempt you from the “substantial presence test”. The substantial presence test determines if you count as resident or non-resident for tax purposes. Roughly speaking a normal person would count as resident for tax purposes if he or she was at least 183 days present in the US during the tax year. However, international students are not normal people and can/should/must use form 8843 to get an exemption from the substantial presence test for 5 years. That’s because international students fall in the category of “exempt individuals” of form 8843.
But what’s the difference between resident and non-resident for tax purposes? The main difference is probably that as resident you need to pay taxes on your world-wide income. In particular this means that if you have capital gains (stocks, funds etc.) on a bank account in your home country, you will need to pay US tax on the earned interest, unless there are some special treaties with your home country. A big catch is that your brokerage bank need to provide you with tax forms for the American IRS if you count as resident for tax purposes which means a lot of nonadministrative hassle for bank. There are many smaller, but also bigger banks worldwide that will just stop doing business with you. However, that does usually not affect checking accounts, but it may affect savings & brokerage accounts. The other aspect is that if you have capital gains in the US, you will be taxed with a fixed rate of 30% unless there is some tax treaty with your home country, for instance Germans don’t need to pay any US tax on capital gains in the US (but of course they need to pay German tax on it).
Either way, it is usually said that international students must file 8843, either because most students prefer to stay non-residents for tax purposes or because their home country demands it. In most countries you will theoretically need to pay tax on your worldwide income, including your US graduate student wage, but also most countries have some type of treaty that allows you to get around it. For details on this you should check with a tax preparer of your home country or just Google long enough.
Either way, make sure that you file form 8843!
- Form 1040NR-EZ
This is the standard simplified (EZ = easy) form that you will need to file as international graduate student (NR is for non-resident). You can find the instructions here, they are very complete (but you don’t need to read everything). However, if you have capital gains in the US, you might need to file another form. The following paragraph illustrates the standard rules to fill in this form in 2014. It should be fairly general, but of course it can happen that there is something that doesn’t apply to you. It’s all on your risk, but should be correct for most graduate students.
- As PennState graduate student you will receive a W-2 form indicating how much you earned in the past tax year and how much tax was automatically deducted by the university. There was tax deduction for Local tax (cell 19), State tax (cell cell 17) and for Federal tax (cell 2) that should appear in the appropriate cells of your W-2 form. Moreover, there is your taxable gross income (cell 1).
- If you are an international student from a country with a tax treaty, you might actually able to subtract a few thousand dollars from this amount. The following website or here or here shows a list of countries, their tax exemption amounts and for how many years this exemption can be claimed. If your country is among them, it’s probably a good idea to check with additional sources and maybe even by reading the official tax treaty document – just to make sure. For instance, if you are from Belgium you can claim an exemption of 9000 USD for 5 years. Either way, if you happen to be lucky to get such an exemption you will need to write the exempt amount on line 6 of form 1040NR-EZ. Moreover, you directly subtract this amount from the taxable gross income on your W-2 (cell 1) and put it on line 3 of form 1040NR-EZ (unless you have some other income that you need to add, but you can basically subtract the exempt amount from your total taxable income). If you used such a tax exemption, you need to quote the exact tax paragraph of your country’s tax treaty at the end of the second page of form 1041NR-EZ. The exact paragraphs are quoted on the website linked above and you can read the tax treaty yourself to make sure.
- If you received a scholarship/fellowship you might have paid tax on it and received a 1042-S form. However, many countries don’t tax scholarships/fellowships and have tax treaties. For instance, if you are from Germany, you don’t need to pay any taxes on scholarships/fellowships you receive in the US during your first fours years. Check this table for more information – again make sure you check yourself additional resources. Usually, you can let PennState know in advance that you are tax-exempt from scholarships and they won’t withhold any money from your scholarships/fellowships (otherwise you will usually see tax deductions in your semester bill under elion because most scholarships/fellowships are handled through the Bursar’s office and not payroll). If there were tax deductions, you can reclaim them by putting the withheld income into line 18b of 1040NR-EZ and mention the scholarship/fellowship as excluded in line 8.
- Your taxable income will also be lowered by the amount you already paid for local and state tax. For this, you need to add the amounts withheld from your W-2 form, more precisely you need to add the amount from cell 17 and 19 in your W-2 form and put into line 11 of form 1040NR-EZ. If you read the instructions carefully, you will see that there is some complicated procedure to figure out if you can subtract ALL your state and local tax, but for students with our income of only a few ten thousand dollars, there shouldn’t be any problem deducting the full amount of local/state taxes. You might even be able to add the LST tax mentioned on your W-2 (cell without number), but the amount should be so small that it doesn’t really matter anyway.
- Finally, the first 3950 USD (in 2014, probably even more in future years) of your taxable income is tax free (unless you make several hundred thousand dollars. Therefore, you can put the current amount (3950 USD in 2014) into line 13 of form 1040NR-EZ. There might be situation where you can deduct more than 3950 USD because you file for yourself and a spouse. You should check this in detail if this applies to you.
- At this stage your original taxable gross income from your W-2 form should be reduced by (a) the exemption amount of your country’s tax treaty, (b) the withheld money for local & state tax and (c) the standard deduction of 3950 USD (for 2014). This can save you up to a few thousand dollars of taxes that you might have paid without needing it. The reduced amount should now appear in line 14 of 1040NR-EZ. You can now use the tax table provided in the instructions of form 1040NR-EZ and lookup your total tax based on your total taxable income in line 14. The resulting amount you will need to put into line 15, 16 and 18 (because they shouldn’t differ unless you needed to pay Medicare tax and received additional forms).
- You can now compare this amount of tax that you need to pay with the amount that was withheld from you. For this, fill in line 18a and 18b (it only applies if there was tax withheld form your scholarships/fellowships shown on your 1042-S). If the sum of 18a and 18b appearing in 21 is greater than your total tax from line 18, you will get tax back.
- Don’t forget: If you had other US income sources as a non-resident for tax purposes, you need to include all this money. In particular, if you had capital gains (stocks, funds etc in an American brokerage account), you CANNOT use 1041NR-EZ, but need to use the longer version. If you still find it too complicated, the Global Office will help you. Read more in the next chapter.
- Last comment for scholarship/fellowship holders who don’t need to teach (full scholarship holders). There are some weird rules regarding the question if you need to pay federal taxes on them or not. In most cases, it is best to trust the W-2 form that you can access through ESSIC. If it tells you under Payroll (upper right corner) –> Earning statements (left) –> Select your tax year that there your taxable gross income is zero, you probably won’t need to pay tax on this scholarship/fellowship. In this case, you also won’t receive a W-2 form. If this means that you don’t need to pay any tax and there was also no tax deducted from your account (for instance because you also received a scholarship through the Bursar’s office where tax was withheld that you might partially of fully get back), you DON’T need to file form 1040NR-EZ, but just form 8843 explained above.
- Form 8843
- State taxes (Pennsylvania)
State tax is significantly less work. Instead of filing with paper forms, you should be able to do it online. In most cases, it is just the easiest to use the website from padirectfile (at least for tax 2014) from the Pennsylvania Department of Revenue as long none of these points apply to you. In general, international graduate students should be able to use it without any problems. Most things should be self-explanatory. Usually, there is not much you can gain and the amount deducted through the university should agree with what you need to pay – unless some cool tax moves apply to your situation.
Another quick comment on full scholarship holders: Usually, you don’t need to work for your scholarship and thus also don’t need to pay any state taxes on such scholarships. This is due to the following Pennsylvania regulation. In most cases, it is best to trust the W-2 form that you can access through ESSIC. If it tells you under Payroll (upper right corner) –> Earning statements (left) –> Select your tax year that there your taxable gross income is zero, you probably won’t need to pay tax on this scholarship/fellowship. In this case, you also won’t receive a W-2 form. In this case, you probably even don’t need to file any state tax because you only need to file in Pennsylania if your taxable income is at least 33 USD.
- Local taxes (State College Borough)
Usually you will receive a tax form in the mail. This tax form will contain a few digit code that allows you to file your taxes online. That is great and should save you some work. Residents pay a few percent, while non-residents pay a flat tax of 1% which should be fairly low. Sadly, there are only vague definitions of a non-resident, but they basically state that everybody who doesn’t intend to stay in State College forever (meaning a long time, as your home) count as non-resident. Thus international students should only pay 1%. If ESSIC tells you under Payroll (upper right corner) –> Earning statements (left) –> Select your tax year that you paid more than 1% as international students, you should check exactly what applies to you.
A final comment on full scholarship holders: Usually, you don’t need to file any local taxes and also won’t receive a letter by the local borough. Again, check through ESSIC if you had taxable income. If not, you also don’t need to pay local taxes.
Help from the Global’s office
The Global Office of PennState has a website providing some information on taxes. However, the information are often incomplete and not up-to-date. However, if you talk to them directly, they will usually provide two different means of help (during the tax season at the beginning of a year):
- They buy an online software for international students that helps to prepare the needed documents. In general, you can always fill in the documents yourself because it is certainly not more complicated than a scalar quantum field theory – but the software helps to save time.
- After you used the software and came to the conclusion that your situation is more complex than what the software offers, that is maybe on the difficulty level of a non-abelian gauge theory, you can book sessions with a professional tax advisor who volunteers to help PennState international students. They are usually very competent and it is free of charge.