Working in the U.S. - Tax Filing Guide for F-1 Students

When filing taxes, international students need to be aware of the difference between resident and non-resident aliens and take advantage of tax treaties, LLC, and AOTC for tax exemptions.

NRA vs. RA

There are two tax residency statuses: Non-Resident Alien (NRA) and Resident Alien (RA).

• Non-Resident Alien: Most international students belong to this category. F-1 students who have been in the U.S. for less than 5 years are classified as NRAs.

• Resident Alien: Non-citizens in the U.S. who have been in the country for more than 5 years, and who have stayed in the U.S. for 183 days or more in the sixth year, will automatically be considered RAs for tax purposes. Once you become an RA, some tax exemptions available to newly arrived F-1 students will no longer apply, and you will need to pay taxes according to the regulations applicable to U.S. residents.

Tax Identification Number

Before filing taxes, you need to obtain a tax identification number. Americans usually use a Social Security Number (SSN) for tax purposes. If you have just arrived in the U.S. and do not have an SSN, you can apply for an Individual Taxpayer Identification Number (ITIN) from USCIS to use as your tax number.

Tax Treaties

Some countries, such as India and China, have tax treaties with the U.S. that provide F-1 students from those countries with tax benefits. For example, Indian students enjoy a standard tax deduction of $13,850 for the 2023 tax year, though this amount changes annually.

Here are some key points to note:

• Tax treaties generally apply to both students and trainees, no matter you are an RA or NRA. F-1 students using CPT or OPT can also enjoy tax benefits.

• In general, the income subject to tax treaties refers to income earned from providing "personal services," including wages from employment (W-2) and contractor work (1099). However, it does not include income from investments, stocks, or bank interest.

• If you are selected for H-1B and complete the status change, your income after the H-1B start date will not be eligible for the tax treaty benefits, as your status in the U.S. will no longer be F-1. For example, if your income before the end of your F-1 status is $3,000, the tax exemption will only apply to that $3,000. Income earned under the H-1B status will not be eligible for this exemption.

• This tax exemption applies nationwide and can directly apply to your federal tax. However, some states do not recognize this exemption for state taxes.

• Typically, the tax exemption from tax treaties is a tax deduction, which is subtracted from your pre-tax income, not from the tax you need to pay. For example, if your pre-tax income is $50,000 and your tax deduction is $5,000, you will be taxed on $45,000 after the deduction. If your pre-tax income is $3,000, you will not owe any tax.

Tuition Tax Credits: Lifetime Learning Credit (LLC) and American Opportunity Tax Credit (AOTC)

The chart above, created by the IRS in 2022, compares the LLC and the AOTC in terms of tax benefits and requirements. If you are a resident alien for tax purposes, you can choose either LLC or AOTC, but not both.

Basic Requirements

To use the AOTC or LLC, you need to meet 3 basic requirements:

• You must have paid education expenses (such as tuition and online learning fees).

• You must be a student at an institution recognized by the IRS. Most U.S. schools (including CPT schools) qualify. You can verify this through the official website: Database of Accredited Postsecondary Institutions and Programs.

• The student must be yourself, your spouse, or your dependent child.

LLC (Lifetime Learning Credit)

The LLC offers a maximum tax credit of $2,000. Graduate students and those pursuing continuing education are eligible to apply.

• Formula: The first $10,000 of higher education expenses × 20%. The maximum credit for a federal tax return is $2,000. If the tax credit reduces your tax payment to zero, you will not receive a refund for the remaining amount.

• Example: If you paid $7,000 for tuition, you will be eligible for a $1,400 tax credit. If your tuition exceeds $10,000, you will qualify for the full $2,000 tax credit.

This tax credit is recommended for Day 1 CPT students. Your school will provide your 1098-T form (Tuition Statement) by January 31. Check the amount and use this form to apply for the LLC when filing your taxes.

If you are working on OPT, you can also use your vocational courses to qualify for the tax credit. The courses must meet the official requirements for Qualified Education Expenses, and you must be able to provide a 1098-T form. This tax credit has no time limit and can be applied to part-time studies, with no restrictions on the number of courses or the need to pursue a degree.

AOTC (American Opportunity Tax Credit)

The AOTC allows for a maximum tax credit of $2,500. If the full amount is not used, 40% of the remaining credit can be refunded. Therefore, if you have no income tax to pay, you can still receive up to $1,000. Eligible expenses include costs for books, supplies, and equipment needed for courses, but do not include expenses for rent, medical insurance, or transportation.

The student must be enrolled at least half-time for at least one academic term during the tax year.

Only students pursuing an undergraduate (bachelor's) or associate degree are eligible for the AOTC. Undergraduate students who are resident aliens can apply for the AOTC, while graduate students and those on CPT or OPT cannot. Therefore, the AOTC is more suitable for students who came to the U.S. for their secondary education and then continued to college.

• Formula: 100% of the first $2,000 of higher education expenses + 25% of the next $2,000. The maximum tax credit is $2,500.

• Example: if your higher education expenses exceed $4,000, you can receive the full $2,500 tax credit ($2,000 + $2,000 × 25%). If your expenses are $3,000, you can receive a tax credit of $2,250 ($2,000 + $1,000 × 25%).