How Nonresident Taxes Work

Foreign Students, Diplomats and Entertainers
Green card holders are considered resident aliens and taxed the same as U.S. citizens.
Green card holders are considered resident aliens and taxed the same as U.S. citizens.
Epoxydude/Getty Images

United States colleges, universities and research centers are magnets for ambitious students and scholars from around the world. The federal government recognizes the advantages of having the world's best minds working on American soil. For this reason, the U.S. Department of State extends temporary visas to students and scholars, and the IRS offers certain tax breaks and exemptions to income earned during their stay.

For starters, the IRS allows foreign students, teachers, trainees, employees of international organizations, and diplomats and their families to qualify as nonresident aliens even if they spend more than 183 days in the country. The IRS calls these visa holders "exempt individuals," not because they are exempt from taxes, but because they are exempt from counting days of presence in the U.S. [source: IRS]. That's a huge tax advantage, because nonresident aliens only have to pay income tax on wages earned from U.S. sources.

Secondly, any student, scholar, trainee or diplomat holding a qualified visa is exempt from withholding Social Security and Medicare contributions from their paychecks. Self-employed individuals with the same visas are also exempt from the self-employment tax [source: IRS].

There's a catch when it comes to capital gains tax, though. The tax law says that any nonresident alien residing in the U.S. for 183 days or more is liable for a 30 percent taxation of capital gains [source: IRS]. In this case, there are no exemptions for students, scholars and diplomats. Each day of residence counts toward the total.

Foreign athletes temporarily in the U.S. for sporting events are among the list of "exempt individuals" for counting their days of presence, but that's where the tax breaks end. Both foreign athletes and entertainers are subject to a flat 30 percent income tax withholding on all earnings during their stay, unless they have a really good tax lawyer who can navigate the IRS rules, which even the agency admits are "complex."

For lots more information about tax exemptions and creative (but legal) tax deductions, check out the related HowStuffWorks articles on the next page.

More to Explore