Tax terms and definitions
Income Tax – When we talk about taxes in the US, in this case we are referring specifically to “Income Tax.” Income tax means that you pay a percentage of any money you earn in the US back to the US government through taxes. Income tax is NOT the tax you pay when you buy items – this is called sales tax. Sales tax is not involved in tax returns, it is simply paid when you buy an item.
Income Tax Withholding – This refers to the amount of money that is taken out of each of your paychecks towards taxes. You have some choice about this when you first start working with an employer, and you indicate your preference with the W-4 form you complete for that employer. The employer will then automatically remove a certain amount of your pay per paycheck, and pay it towards your taxes.
Many people choose to have their tax money taken out of their pay with each paycheck, but sometimes you can also choose not to have any taken out. Because this is different for everyone, each year most people are required to complete a “Tax return” to decide if you paid too much tax money, or not enough tax money.
FICA tax withholding is a tax used to fund Medicare and social security in the US. Many workers in the US will have this deducted from their income for each paycheck. Most nonresident aliens, such as international student and scholars in F-1 or J-1 status, are exempt from FICA tax withholding. However, international students and scholars who are considered residents for tax purposes are not exempt from this. To determine if you are exempt from FICA, read more about it here and talk to a tax professional if you have additional questions.
Tax Return – Each person that has earned money in the US files a tax return. The tax return uses tax documents that you receive from your employer(s) that reports how much money you earned from them, and how much tax money was withheld for taxes already. You also answer other questions that determine if you might be eligible for different kind of tax benefits (such as a tax treaty the US might have with your country).
Depending on this information, you might receive a tax refund, or you might have to pay tax money to the US government.
Tax Refund – If you receive a refund, this means you already paid too much tax money that your employer took out of your paycheck over the tax year. Your tax return uses formulas to determine how much money you should get back, and you would receive this money back to you as a tax refund. You can usually provide bank account information where the money would automatically be deposited, or you can request a check be mailed to you.
Tax Year – Tax Returns look at an entire year over which you paid taxes. For example, you would work some or all of the year 2014. Once the year is over, in January 2019, your employer(s) would begin preparing and sending you tax documents, summarizing how much money you earned and how much tax money you paid. Once you receive those documents, you would work on preparing your tax return for the entire year 2018. Your tax return is due each year by April 15, and includes only tax information from the previous year. So in this example, you would submit your 2018 tax return no later than April 15, 2019.
ITIN – An ITIN is a tax ID for individuals that don’t work in the US (so don’t have an SSN, a social security number) but still need to file a tax return. This is usually only the case for students with very large scholarships that are taxed. If someone has an SSN, they do NOT need an ITIN.
Who has to file a tax return?
- ALL individuals in the US in F-1, F-2, J-1 or J-2 status must file one form, called an 8843.
- Individuals that work and earn more than the minimum amount in the US will need to file a complete tax return, usually using a form called a 1040. The minimum amount varies each year – please see the Federal tax return and state tax return links for the most recent information.
Non-Resident Alien (NRA) or Resident for tax purposes?
Taxes are split into two categories – Non-Resident Alien (NRA) taxes, and Resident taxes. This is determined by your duration of time spent in the US, and possibly your immigration status. NRA’s and residents pay different percentages of taxes, and have different tax options and benefits, so it’s very important to file your taxes following the guidelines for the correct category.
Substantial Presence Test – this test determines if an individual is an NRA or Resident for tax purposes. The most basic summary for F-1 students is that if you are in the US for less than 5 years, you file as an NRA. After 5 years, you become a resident for tax purposes. The software provided by the ISSS office for international student tax returns will include this test, to make sure you are filing appropriately.
TurboTax and other tax software programs – Please note that many students will report their friends recommending tax services like a popular service called TurboTax. These online programs simplify the tax return process, and are sometimes free. While this might sound tempting, please note that TurboTax and most programs like it are specifically for RESIDENT taxes. If you are an NRA (non-resident alien) for tax purposes, your taxes would be done incorrectly and you would eventually be caught by the IRS (Internal Revenue Service) and made to pay the difference, possibly with fines.
Tax Authorities
Taxes in the US are managed, collected and refunded through the IRS – the Internal Revenue Service.