Savanna Hoffman
The tax status of housing for international students in the US depends on a variety of factors, including the student's country of residence, the type of visa they hold, the source of their income, and the length of their stay. International students on certain types of visas who receive taxable scholarships, fellowships, or grants may be required to pay taxes on this income. Additionally, the US has tax treaties with certain countries that may exempt students from paying taxes on their scholarships or fellowships. Housing expenses may be deductible or excludable from taxable income, depending on whether the student meets certain requirements, such as the bona fide residence test or the physical presence test.
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What You'll Learn
International students as nonresident aliens
International students on F, J, M, or Q visas are typically considered nonresident aliens for tax purposes in the United States. This status generally applies during the first five calendar years of their stay. However, if they intend to remain in the U.S. for more than a year and are employed or receive certain types of income, they may establish a "tax home" and become taxable on their U.S.-sourced income.
Nonresident alien students who are temporarily present in the U.S. on F, J, M, or Q visas and are not employed or engaged in a trade or business are generally not considered to have a tax home in the U.S. However, if they receive U.S.-sourced scholarship or fellowship income, they may be treated as engaged in a U.S. trade or business, and this income may be taxable.
For nonresident aliens, including international students, certain rules and exclusions apply regarding housing and income tax. While housing expenses, including rent and utilities, can be considered when calculating taxable income, there are specific limitations and requirements. The foreign housing exclusion or deduction can reduce regular income tax but not self-employment tax. Additionally, housing expenses must be reasonable and cannot include meals, property purchases, or improvements that increase the property's value.
It is important to note that the rules for taxation of international students can be complex, and individual circumstances may vary. While this information provides a general overview, consulting official IRS guidelines and seeking professional tax advice is recommended for specific situations.
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Tax treaties between the US and other countries
International students in the US are taxed in the same way as nonresident aliens. They are only taxed on US-source income. International students on F-1 visas are considered nonresident aliens for tax purposes. They must pay tax on US-source income, including employment earnings, taxable scholarships, and income from donating plasma.
If an international student has been present in the US for 183 days or more and has a tax home in the US, they are taxed on US-source capital gains. A tax home is established if the student intends to stay in the US for more than a year and is employed or receives a scholarship. The activity of being a student does not constitute a trade or business and thus cannot establish a tax home. However, receiving a scholarship may be considered a US trade or business, and any US-source scholarship income is treated as effectively connected with a US trade or business.
The US has income tax treaties with several foreign countries. These treaties provide reduced tax rates or exemptions for foreign residents on certain income sources within the US. The reduced rates and exemptions vary among countries and specific items of income. For example, under the US-India Income Tax Treaty, certain nonresident aliens from India can claim the standard deduction. These treaties also benefit US citizens or residents by providing reduced tax rates or exemptions on certain income sources from within the treaty countries. Most income tax treaties contain a "'saving clause' to prevent US citizens or residents from using the treaty to avoid US source income taxation.
Some states honor the provisions of these tax treaties, while others do not. Therefore, it is essential to consult the tax authorities of the specific state to determine if the treaty applies. The Treasury Department's website provides access to the text of many US income tax treaties, protocols, and accompanying technical explanations.
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Tax home concept
The tax home concept is important for nonresident alien (NRA) students as it determines whether their capital gain income will be taxable in the United States. An NRA student who is present in the US for 183 days or more is taxed on US-sourced capital gains only if their tax home is in the US.
Tax Home for NRA Students
If an NRA student is temporarily present in the US on an F, J, M, or Q visa and intends to stay for more than a year, their tax home status depends on their employment status and source of income. If they are employed or self-employed, their tax home is established in the US from the date their employment or self-employment begins, provided it is expected to last for more than a year. If they receive a US-sourced scholarship or fellowship income expected to last for more than a year, their tax home is established in the US from the date they first become eligible to receive this income.
NRA students who do not fall into these categories, such as those who are not employed or receiving US-sourced scholarship income, may not establish a tax home in the US. The activity of being a student alone does not constitute a trade or business and therefore cannot establish a tax home.
Tax Home Definition
A tax home is generally defined as the entire city or general area of an individual's primary place of work, rather than their residence. It is used to determine which work-related travel expenses are deductible. If an individual works in multiple locations, their tax home is typically the location where they spend the most time for business purposes. For individuals without a fixed workplace, such as those who work remotely or have assignments in multiple places, their tax home may be their actual home or where they regularly live.
Tax Implications of Tax Home
Having a tax home in a foreign country can qualify individuals for certain tax benefits, such as the foreign earned income exclusion, foreign housing exclusion, and foreign housing deduction. The foreign housing exclusion and deduction can reduce an individual's regular income tax but will not reduce self-employment tax. These exclusions and deductions are subject to specific requirements and limitations, such as the need to meet certain residency tests and limits on housing expenses.
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Foreign housing exclusion
The Foreign Housing Exclusion is a provision that allows US taxpayers living abroad to deduct the cost of rental housing overseas from their gross income on their US tax return. This exclusion is designed to reduce the financial burden of living overseas.
To be eligible for the Foreign Housing Exclusion, you must first qualify for the Foreign Earned Income Exclusion (FEIE). To qualify for the FEIE, you must pass either the Physical Presence Test or the Bona Fide Residence Test. The Physical Presence Test requires you to be physically present in a foreign country for 330 full days within any 12 consecutive months. The Bona Fide Residence Test requires you to be a bona fide resident of a foreign country for an uninterrupted calendar year (January 1 to December 31).
Once you have qualified for the FEIE, you can then determine your eligibility for the Foreign Housing Exclusion. Your housing costs must exceed 16% of the FEIE amount for the specific tax year. This 16% represents the base housing cost for living in the United States. If your housing costs in a foreign country exceed this base amount, you can then exclude or deduct the total of your qualifying expenses up to a maximum amount. The maximum amount varies depending on the location where you incur housing expenses. The IRS provides a list of cities and their respective maximum allowable amounts, which can be found in the instructions for Form 2555.
Qualifying expenses for the Foreign Housing Exclusion include rent, utilities, property insurance, small repairs, and parking fees near your home. It's important to note that expenses such as cable, phone, domestic helper costs, meals, and the value of employer-provided lodging are not considered qualifying expenses. Additionally, any expenses that are considered lavish or extravagant are also excluded.
The Foreign Housing Exclusion is computed in parts VI, VIII, and IX of Form 2555, which is the same form used to file for the FEIE. It is important to note that choosing the Foreign Housing Exclusion has implications for claiming foreign tax credits or deductions. Once you choose to exclude foreign housing amounts, you cannot take a foreign tax credit or deduction for taxes on the same income.
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Taxable scholarships
The US Internal Revenue Service (IRS) states that nonresident alien (NRA) students on F, J, M, or Q visas who are temporarily present in the US and receive US-source scholarship or fellowship income are considered to be engaged in a US trade or business. This means that any income from scholarships or fellowships is taxable.
If an NRA student has no employment or trade in the US and receives no scholarship or fellowship income, they may have no US tax home at all. However, if an NRA student is employed in the US, they have established a US tax home and are subject to US tax on their US-source capital gains income.
The tax rate for withholding federal income tax on scholarships for nonresident aliens is 30%. However, if the nonresident alien is a student with an "F," "J," "M," or "Q" visa, the tax rate may be reduced to 14%. This reduced rate applies to taxable amounts received that are either incident to a qualified scholarship or granted by certain organizations.
The University of Oregon's international students and scholars who receive scholarship or fellowship stipends may be required to file a US and Oregon tax return. This requires having an ITIN or SSN for US income tax filing purposes.
The IRS defines non-qualified education expenses to include student activity fees, athletic fees, insurance expenses, certain travel, room and board, health insurance, living allowance stipends, or other expenses not directly related to an individual’s academic course of instruction. Amounts in excess of qualified education expenses are taxable to the student unless scholarship/fellowship treaty benefits are available and formally claimed.
In addition to the foreign earned income exclusion, individuals can also claim an exclusion or deduction from gross income for their foreign housing amount if their tax home is in a foreign country and they qualify under certain tests. The foreign housing exclusion applies only to amounts paid for with employer-provided funds, while the housing deduction applies only to amounts paid for with self-employment earnings. It's important to note that housing expenses have certain limitations and exclusions, such as excluding expenses that are considered lavish or extravagant.
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Frequently asked questions
Taxable income for international students includes any income from scholarships, fellowships, grants, and financial aid in excess of eligible tuition charges. Additionally, if an international student is employed or self-employed, their income may be subject to taxation.
International students may be eligible for a foreign housing exclusion or deduction, which can reduce their taxable income. This applies to housing expenses incurred in a foreign country, including rent and utilities, but does not cover meal expenses or the cost of buying property.
International students on scholarships are typically subject to a 14% federal and 3.75% state withholding rate on the taxable portion of their scholarship. However, if the student's country has a tax treaty with the US, their scholarship may be exempt from taxation.
