Many people come across the world to the U.S. under a student VISA. And although most people understand the benefits and limits of having a student VISA, many people do not know that you may be subject to U.S. income tax – even if you aren’t working in the U.S. or otherwise earn or receive U.S. source income.
For U.S. citizens, green card holders, and other residents, the U.S. generally imposes income tax on worldwide income from all sources. However, for nonresident aliens, the U.S. taxes income effectively connected with a U.S. trade or business or income that is not effectively connected with a U.S. trade or business, such as interest, dividends, and potentially certain capital gains.
The Substantial Presence Test
Normally, non-U.S. citizens who are substantially present in the United States are considered U.S. tax residents by way of meeting the substantial presence test. The Substantial Presence Test considers a non-U.S. citizen as a U.S. resident for tax purposes if you have been physically present in the U.S. for at least 31 days during the current year, and 183 days during the 3-year period, which includes the current year and the 2 years immediately before that, which count for all the days you were present in the current year, 1/3 of the days you were present in the first year before the current year, and 1/6 of the days you were present in the second year before the current year.
Student Visa
One of the exceptions of the Substantial Presence Test is an individual with a student visa. Student VISA holders enjoy a significant tax advantage. Student visa-holders are presented in the U.S. on an “F”, “J”, “M”, or “Q” visa, and are exempt from the substantial presence test. In other words, days spent in the U.S. on a student visa do not count toward the substantial presence test for up to five years. Therefore, they are generally exempt from reporting and paying income tax on their worldwide income for the five-year period under those visa types. It is important to note that the exemption may be available after five years if the student can prove that they do not intend to reside permanently in the U.S. and have substantially complied with the requirement of the nonimmigrant status.
Student VISA Holders and the Sixth Year:
After five years, students can no longer automatically exclude days of presence in the U.S. from counting toward the substantial presence test. The substantial presence clock starts ticking as soon as the fifth year has passed. Those on student visas and who remain after the fifth year may lose their tax-favored status and become U.S. persons under the law, which includes the global taxation requirement.
It happens more than often when a temporary stay in the U.S. turns into a permanent stay, due to students marrying a U.S. national, or gaining U.S. employment, therefore changing their U.S. visa type. If you are a student in this situation and have significant income or assets outside of the U.S., you should consult with an international and cross-border tax advisor before changing your status. Pre-immigration tax planning is vital for everyone, especially high-net-worth students and those from high-net-worth families.
The best time to begin planning to manage your taxes in the United States is well before you change your visa status in the country. Schedule your FREE 15-minute call with us today to learn more.
