Non-American students are increasingly looking to US universities as an alternative to their home country’s higher education system, but they need to be mindful of the oftentimes complex US Federal and State tax regimes. We’ve outlined the processes and pitfalls in this article.

If you've chosen to attend a US university, you must also have the right to move there.

Whether you already have that right as a US citizen, or you request that right through a US visa program, this will have an impact on how you are treated for US Income Tax purposes and what steps you will need to take to ensure you are US tax compliant.

American citizens and Green Card holders living outside the US

As an American citizen or Green Card holder you are already required to report your worldwide income to the IRS on your annual Form 1040 filing. Joining a US university as a student will not change this. Changes that you should be alerted to, but are not limited to, include:

1. Your residence status Dependant on various factors, most significantly how many days you spend in the US, you may lose your home country tax residence and gain a US tax residence or, very possibly, keep your home residence while also acquiring a US tax residence. You’ll then need to consider whether there is treaty claim available to avoid double taxation.

2. The US tax filing and payment deadlines If you’re US resident on the initial 15 April Income Tax filing deadline, you’re not entitled to the automatic two-month extension to June. You must therefore remember to request your 15 October extension by the 15 April deadline. Moreover, any US tax will be due on 15 April and late payment penalties and interest will apply thereafter. Furthermore, you will not be eligible to request the extra filing extension to 15 December.

3. Your US State tax position If you’re returning to your home State, or moving to a completely new State, you‘ll need specialist advice on the tax consequences for you, and your family if you’re still a minor or a dependant.

Student visa holders

Federal taxes

Most non-US citizens intending to study at a university in the US will apply for an F-1 visa. For US Federal Income Tax purposes, as an F-1 visa holder you’ll be considered an ‘exempt individual’ for up to five calendar years, as long as you remain in compliance with the rules of your visa.

As an ‘exempt individual’ you’re entitled to exclude your US days from the US substantial presence test, which is a test used to determine if an individual is US tax resident or not. This exclusion is not automatic, and an annual claim must be made by filing Form 8843: Statement for Exempt Individuals and Individuals with a Medical Condition.

Assuming that the above requirements are met, you’ll be treated as a non-resident alien (NRA) for US Income Tax purposes. In practical terms this means that, as prior to your US studies, you’re only liable to US Income Tax on your US sourced income.

Capital gains

For US Income Tax purposes, realised gains and losses on capital items are taxed alongside income. There’s no separate Capital Gains Tax.

Whether your realised capital gains and losses are US sourced for Income Tax purposes may change when you move to study in the US. This is because gains and losses on personal property (being anything that is not real estate, such as stocks and shares) are sourced in accordance with your tax home and the aforementioned exemption to the US substantial presence test does not impact your tax home under general law.

State taxes

It’s important to remember that in addition to Federal taxes, each US State has the right to implement their own State Income Tax. These vary State by State, with some states being Income Tax free (such as Texas) and others charging double digit rates (such as California where the top rate is 12.3% plus a 1% surcharge for income in excess of $1million.)

Whether you will be considered a State tax resident will also be subject to the specific rules of that State. Given that not all States follow the Federal guidelines on double taxation relief, it’s important to know this before you arrive.

Additional considerations for beneficiaries of non-US trusts

The US tax position can be complicated where you are residing in the US and you’re the beneficiary of a non-US trust. Generally, it can be unfavourable for non-US trustees to retain their annual Distributable Net Income (DNI) due to the higher US tax rate that applies on future distributions of accumulated income (known as Undistributed Net Income (UNI)). Click here for more information on US tax for non-US trusts.

However, for students (who are non-US citizens) residing in the US, the above income exemption can apply to distributions of income received from a non-US trust.

The position will be more complicated should you receive a trust distribution that is matched to capital gains for US tax purposes, as this would not fall within the exemption and so be taxable in the US. In the home jurisdiction, it could be the trustees who are subject to tax on the trust’s capital gains and so the availability of tax credit relief will need to be reviewed and this can be affected by the timing of the home country tax payment.

In view of the above, you and your trustees should seek advice before you move to study in the US so that your position can be optimised, including considering the potential longer-term scenario and implications should you remain in the US after graduating and no longer fall within the student income exemption.

What should you do?

If you or someone in your family is considering US higher education and you have questions about how your tax position will be affected, or for help and guidance in dealing with the IRS and State tax authorities, you should seek professional advice to ensure you’re compliant and to minimise your tax bill wherever possible. As is the case with any relocation, advanced planning will be key to ensuring your US tax positions is optimised and no unexpected charges/outcomes arise.