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 below.
Author's Note: How Nonresident Taxes Work
My family and I lived abroad in Mexico for six years. Two of my children were born in Mexico, but both my wife and I are passport-carrying Americans. While in Mexico, my wife worked for an international school and the staff there handled all of the paperwork for Mexican income taxes. I worked as a freelance writer for American newspapers and magazines, so I didn't bother paying income tax in Mexico. Researching this article, though, I'm starting to wonder if I should have. Sadly, skirting income tax is a proud tradition in Mexico, so it's unlikely that anyone would ever come after me for a few spare pesos. In the meantime, I'll continue to live by my credo: Ignorance of foreign tax laws is bliss.
- IRS. "Alien Liability for Social Security and Medicare Taxes of Foreign Teachers, Foreign Researchers, and Other Foreign Professionals" (Nov. 6, 2014) http://www.irs.gov/Individuals/International-Taxpayers/Alien-Liability-for-Social-Security-and-Medicare-Taxes-of-Foreign-Teachers,-Foreign-Researchers,-and-Other-Foreign-Professionals
- IRS. "Filing Past Due Tax Returns" (Nov. 6. 2014) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Filing-Past-Due-Tax-Returns
- IRS. "FIRPTA Withholding: Withholding of Tax on Dispositions of United States Real Property Interests" (Nov. 6, 2014) http://www.irs.gov/Individuals/International-Taxpayers/FIRPTA-Withholding
- IRS. "Fixed, Determinable, Annual, Periodical (FDAP) Income" (Nov. 6, 2014) http://www.irs.gov/Individuals/International-Taxpayers/Fixed,-Determinable,-Annual,-Periodical-(FDAP)-Income
- IRS. "Introduction to Residency Under U.S. Tax Law" (Nov. 6, 2014) http://www.irs.gov/Individuals/International-Taxpayers/Introduction-to-Residency-Under-U.S.-Tax-Law
- IRS. "Nonresident Alien — Figuring Your Tax" (Nov. 6, 2014) http://www.irs.gov/Individuals/International-Taxpayers/Nonresident-Alien---Figuring-Your-Tax
- IRS. "Publication 901" (Nov. 6, 2014) http://www.irs.gov/publications/p901/ar02.html
- IRS. "Social Security/Medicare and Self-Employment Tax Liability of Foreign Students, Scholars, Researchers, Teachers, and Trainees" (Nov. 6, 2014) http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Student-Liability-for-Social-Security-and-Medicare-Taxes
- IRS. "Substantial Presence Test" (Nov. 6, 2014) http://www.irs.gov/Individuals/International-Taxpayers/Substantial-Presence-Test
- IRS. "The Taxation of Capital Gains of Nonresident Alien Students, Scholars and Employees of Foreign Governments" (Nov. 6, 2014) http://www.irs.gov/Individuals/International-Taxpayers/The-Taxation-of-Capital-Gains-of-Nonresident-Alien-Students,-Scholars-and-Employees-of-Foreign-Governments
- IRS. "Withholding Exemption on Effectively Connected Income" (Nov. 6, 2014) http://www.irs.gov/Individuals/International-Taxpayers/Withholding-Exemption-on-Effectively-Connected-Income