Foreign Students could be in immigration trouble for filing the wrong tax returns

As a foreign student in the United States on an F-1 or J-1 Visa, you're most likely filing the wrong tax return if you use Form 1040 or 1040EZ.

I'll explain, step by step.

If you're a U.S. Citizen or Permanent Resident (Green Card Holder), you can file all the regular forms, including the Form 1040 or 1040EZ. This category clearly doesn't apply to foreign students as they are neither citizens nor permanent residents, so we'll move on.

If you're NOT a U.S. Citizen or Permanent Resident i.e. you're in the United States temporarily on a visa, then for tax purposes, you're either a Resident Alien or a Nonresident Alien.

The latter, Nonresident Alien, is your default. This category of people can only file 1040NR or 1040NR-EZ.

The former, Resident Alien, can file the same forms as U.S. Citizens and Permanent Residents. But to be considered a Resident Alien for tax purposes, you have to pass one of two tests;

The Green Card Test or The Substantial Presence Test.

The Green Card Test:

"You are a resident, for U.S. federal tax purposes, if you are a lawful permanent resident of the United States at any time during the calendar year. This is known as the "green card" test. You are a lawful permanent resident of the United States, at any time, if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the U.S. Citizenship and Immigration Services (USCIS) issued you an alien registration card, Form I-551, also known as a "green card."

By virtue of being a foreign student, you by default do not pass The Green Card Test because you're on a visa, so your only chance at this point is to pass the substantial presence test.

The Substantial Presence Test:

To pass this test, you must be physically present in the United States on at least:

31 days during the current year, and

183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

- All the days you were present in the current year, and

- 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.

Now you're thinking, I've been here for at least 1 year or 365 days so I definitely qualify.

Not so fast!

There's another exemption to the rule.

The IRS says you cannot count your days in the United States if you're an exempt individual.

Who is an exempt individual?

- Professional Athlete

- Foreign Government Related Individual under an "A" or "G" visa.

- A teacher or trainee under a "J" or "Q" visa.

- A student under an "F", "J", "M" or "Q" visa.

In other words, as a student, your days qualify as zero because you're exempt from counting it. Therefore, you do not meet the Substantial Presence Test, because within the context of this rule you're technically not physically present in the US.

Thus, you're right back at the original Nonresident Alien status, which then means you're required to file 1040NR or 1040NR-EZ and not the regular 1040 or 1040-EZ.

Why would students want to file Form 1040 or 1040-EZ?

Because there are more filing statuses, more available deductions i.e. the standard deductions and credits, etc. In other words, they potentially pay less taxes. Unless the U.S. has a Tax Treaty with their home country, which is beyond the scope of this article.

Confused yet?

Hang on, there's one last important rule to note.

If you're desperate to file a Form 1040 instead of a Form 1040NR, the good news is the exemption period only last 5 calendar years.

For example:

If you came into the U.S. as a student on 1/1/2015, then you'll be required to file 1040NR until the end of 2019. From 2020, you're free to file a regular 1040.

Why is any of this important?

1. It's generally good to comply with the law - especially tax law.

2. It's become doubly important if you have aspirations to become a Permanent Resident or a Citizen.

I'll will stay away from giving legal advice, as I'm not a lawyer, but a reasonable person may conclude that if you're not compliant with tax law, it might hurt your immigration case.

The good thing about returns is that it can also be amended, and that is seen by the IRS as reasonable effort to correct a past wrong. Thus, if you amend your returns to the right form, yes you might owe a bit more taxes, but at least you're compliant for immigration.

Lastly, you have to demonstrate "good moral character" to become eligible to naturalize as a U.S Citizen. Does filing the wrong returns and reaping tax benefits from it demonstrate "bad moral character"? I wouldn't know, because I'm not a lawyer. Just a Certified Public Accountant who knows a thing or two about taxes :)

On the tax side, the are exemptions to exemptions to exemptions to this issue, but the above should apply generally. However, if you're still confused by any of this, feel free to schedule time to chat here.

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