Literature Review

The United States income tax system can be difficult to comprehend for international students. This is because international students working in the United States either at the local bookstore or in any company are required to file an income tax return to what they have earned from their employment. Moreover, depending on the situation in terms of the residency status of the international students of how much they earn, they may also be required to pay income tax to the Internal Revenue Service (IRS). Income for international students can occur in the form of employment, scholarships and graduate assistantships. While employment taxes depends on how often the students’ wages or how often they are paid, scholarships or treaty benefits are taxed at a rate of 14% (U.S. Tax Center, 2018). Tax return is utilized to determine the amount of tax an international student has paid against the amount of tax he or she owes, thus, revealing whether the student owes more tax or is owed a refund. 

The U.S. Tax Center (2018) states that, taxation of the income of an international student depends immensely on his or her residency status. In as much as the United States immigration statutes refer to aliens as immigrants, non-immigrants and illegal or undocumented aliens, the tax laws in the United States normally utilize the terms resident aliens and nonresident aliens for taxation purposes when it comes to international students. In general, Resident Aliens have been in the United States for more than five calendar years and determined through various processes. They are taxed in the same manner as United States citizens on their local and international income (U.S. Tax Center, 2018). On the other hand, Nonresident Aliens have been in the United States for less than five calendar years. They are taxed according to specific rules contained in particular parts of the Internal Revenue Code (U.S. Tax Center, 2018). It is imperative to note that the source of income is extremely prominent in that, a nonresident alien is only obligated to pay federal income tax on the income emanating from sources within the United States, as well as, income that is effectively connected with a business or trade affiliated to the United States. As mentioned above, the residency status of Resident Alien is determined through specific processes. For instance, as denoted by the U.S. Tax Center (2018), an alien can become a resident alien through admission to the United States as a Lawful Permanent Resident pursuant to the immigration laws; in other words, the Green Card Test. Other ways include passing the Substantial Presence Test or making the First-Year Choice whereby the foreigner passes the Substantial Presence Test a year earlier than stipulated in the rules (U.S. Tax Center, 2018).

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According to the U.S. Tax Center (2018), filing tax documents is mandatory exercise and there are certain prerequisites that pertain to international students. For instance, there is no minimum dollar amount of income that is capable of triggering a filing requirement for a nonresident alien, that is, a foreign scholar or international student. This is because as determined by the U.S. Tax Center (2018), the normal filing thresholds applicable to the United States citizens and resident aliens are not applicable to nonresident aliens. Nonetheless, for a nonresident whose only source of income in the United States is wages, he or she is not required to file a United States federal income tax return except in situations whereby the wages exceed the personal exemption amount. There are certain personal exemptions for international students.

Taxpayers are permitted to claim a personal exemption for themselves and for the dependents they espouse. The U.S. Tax Center (2018) describes a personal exemption as a tax exemption that is akin to a tax deduction since it lowers the taxable income. Based on this understanding, filing is a requirement that nonresident alien students must comply with if they have an income that is completely or partially exempt from tax pursuant to the terms of a tax treaty, a taxable fellowship or scholarship, as well as, any other income that is taxable as outlined under the Internal Revenue Code (U.S. Tax Center, 2018). On the other hand, filing is not a requirement that nonresident alien students must comply with if they have an income from foreign sources, a fellowship or scholarship that is entirely tax free, interest income from a United States savings and loan institution, bank, insurance company, credit union or investment, as well as, any other income which is contemplated as nontaxable pursuant to the Internal Revenue Code (U.S. Tax Center, 2018). 

Both resident and nonresident aliens require an Individual Taxpayer Identification Number (ITIN) or a Social Security Number (SSN) for use on tax related documents. However, it is vital to note that an Individual Taxpayer Identification Number is for federal tax purposes only and does not entitle an individual to Social Security benefits or enable them to alter his or her immigration status in the U.S. Therefore, irrespective of whether an international student is resident alien or nonresident alien, he or she is required to provide his or her Individual Taxpayer Identification Number in every situation the Social Security Number is requested on the tax return. Determining which income to report can be daunting task for international students. However, as the U.S. Tax Center (2018) outlines, there are certain requirements that alien students should adhere to when reporting their income on the United States income tax return. 

Resident aliens are required to report both their local and international incomes on Form 1040, 1040A or 1040EZ as is done by United States citizens. Moreover, resident aliens are not allowed to claim exclusions of income that are based on Tax Treaties with only certain exceptions for foreign scholars and foreign students (U.S. Tax Center, 2018). When it comes to nonresident alien students, they are required to utilize Form 1040NR or 1040NR-EZ for purposes of reporting only income that is sourced in the United States or that which is effectively connected to a business or trade that is affiliated to the United States. In addition, nonresident alien students who get interest income from deposits with a United States savings and loan institution, bank, insurance company, credit union or those who get Portfolio Interest are exempted from taxation from interest income accrued through these avenues as long as the interest income is not effectively connected to a business or trade that is affiliated to the United States (U.S. Tax Center, 2018). In the case of dual status alien students, they are required to report both their local and international incomes for the part of the year whereby they are resident alien students and report only income sourced in the United States or income that is effectively connected to a business or trade that is affiliated to the United States (U.S. Tax Center, 2018). The U.S. Tax Center (2018) further states that dual status alien students are required to report interest income from all sources for the part of the year whereby they are resident alien students and not from interest income derived from deposits with United States savings and loan institution, bank, insurance company, credit union and investments that generate portfolio interest for that part of the year in which they are nonresident alien students so long as the interest income is not effectively connected to a business or trade that is affiliated to the United States. Filing tax documents can be a cumbersome task. However, international students can file their tax documents effectively through online channels.

Work CitedU.S. Tax Center. (2018). Taxes for International Students. Retrieved 24 April 2018, from https://www.irs.com/articles/taxes-for-international-st

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