The student visa exception: a good thing, but not a panacea

In a previous article, we provided an overview of determining a person’s U.S. tax residency status under the Substantial Presence Test (the “SPT”), a test that relies on a mathematical formula to calculate the days of an individual’s physical presence in the United States. For some “students” (a term defined not only by U.S. tax law, but also by U.S. immigration law), there is a major benefit: their days in the United States while they stay with a Student visas are generally not “counted” when applying for SPT. This article provides an overview of the student visa exception and highlights some potential pitfalls for the unwary.

For tax purposes, a “student” is defined as a person who is temporarily present in the United States on the appropriate visa and who substantially complies with the terms and requirements of that visa. Most often for students, the appropriate visa is an “F” visa. The individual attending school will receive an F-1 visa, and certain immediate family members of the individual may receive derivative status through an F-2 visa.

The possibility for a student to exclude days of presence in the United States has its obvious advantages, but this exception is not unlimited. In general, a student can only exclude days under the student visa exception for five years, with any part of a year counting as a full year for this purpose. Once the five-year threshold is crossed, a student can no longer exclude days of presence in the United States, unless other measures are taken. The following simple example illustrates these basic rules:

  • Mr. Z first arrives in the United States on December 30, 2017, on an F-1 visa, to begin a program of study. 2017 counts as a full year towards the five-year threshold.
  • Mr. Z remains in the United States until the end of 2021 and meets the terms of his student visa. 2021 will count as the fifth year of MZ’s student status
  • Mr. Z’s days in the United States from December 30, 2017 to December 31, 2021 are not “counted” for purposes of applying the TPS.
  • Mr. Z decides to continue his studies in the United States until 2022 and obtains the appropriate immigration law approvals to remain in the United States in 2022 on his student visa.
  • Absent further action, Mr. Z’s “student” status will generally end on January 1, 2022 and Mr. Z will begin counting his days in the United States.

In order to extend student status beyond the fifth year, the individual must establish that they do not intend to reside permanently in the United States and that they have substantially complied with the requirements of his student visa. The facts and circumstances to be considered in determining whether a person has demonstrated the requisite “intent” include, but are not limited to: (i) whether that person maintained a closer connection with a foreign country; and (ii) whether the individual has taken affirmative action to change the individual’s status to that of a permanent legal resident (i.e., a green card holder).

It may seem that for a student whose days in the US are not counted for TPS purposes, there are no US income tax issues that the student has to deal with. worry; however, that would be a dangerous assumption to make. For starters, like any other nonresident alien, a student will still be subject to US tax on their US-source taxable income (for example, a dividend paid by a US corporation). Additionally, although capital gains are generally not subject to US income tax in the case of a nonresident alien (with the exception of US real estate gains and certain US business or commercial gains), an often forgotten rule lurks in the shadows.

For nonresident aliens who are physically present in the United States for 183 days or more during the tax year, a 30% tax is imposed on US-source capital gains. This rule has very limited application, because for most individuals, if they are present in the United States for 183 days or more, they are likely to be considered US tax residents, subject to US income tax in under the normal rules that apply to all US taxpayers. . Students, however, are one of the few categories of people to whom this rule applies.

The source of capital gains for these students is generally determined based on the location of their “tax household”. For these purposes, tax household generally means the person’s principal place of business or, if the person has no principal place of business, the person’s usual place of residence in the real and substantial sense (i.e. i.e. where the person spends most of his or her time). Determining the location of an individual’s tax household can be difficult and often requires the analysis of subjective elements. Although not a binding law, the IRS addresses the issue and provides guidance on its website (Nonresident Alien Students and the Tax Home Concept and The Taxation of Capital Gains of Nonresident Alien Students, Scholars and Employees of Foreign Governments).

Clients and their advisors should remember that just because a person’s days in the United States do not count for TPS purposes does not mean that US tax matters can be overlooked. This can be especially important in a pre-immigration planning setting, where a person is going to school in the United States with the intention of staying on a more permanent basis after completing their program of study. Traditional pre-immigration planning techniques in this context could have disastrous US tax results by triggering large capital gains which, because the individual has a US tax home, are subject to US federal income tax. Consideration should also be given to the effect that spending so much time in the United States will have on the person’s domicile status for US gift and estate tax purposes.

Additionally, it is important to remember that while classification as a student has significant tax consequences, the starting point of the analysis is a matter of immigration law. In order to benefit from the tax advantages linked to student status, the person must comply with the conditions of their student visa. Therefore, an immigration lawyer should always be consulted to sort out these issues.

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