The F-1 Student Visa Income Tax & FBAR, An Unwelcome Surprise

The F-1 Student Visa Income Tax & FBAR 

Foreign nationals who are non-resident aliens and not US persons want to travel to the United States for educational purposes, often times their quest will begin on either an M-1 or F-1 visa (with dependents traveling on an F-2 visa).  While both of these types of these are for students, the F-1 visa is for academic students such as University and the M-1 visa is for vocational students in order to learn a non-academic vocation. In general, for the first five years that a nonresident alien is in the United States on an F-1/F-2 Visa, they will not be considered US persons. That means that these types of students are not taxed on their worldwide income and since they are not considered US persons are not required to file forms such as the FBAR or FATCA. Let’s go through some of the basics of how an F1/F2 student as well as CPT and OPT are impacted by the US tax rules.

First 5 Years on F-1 Visa

For the first five years that a non-resident alien student is in the United States on an F1 visa, they are not required to pay tax on their worldwide income – although they will report their US income – and since they are not considered US persons, they are not required to report their foreign accounts, assets, or investments.

As provided by the IRS:

• • • Foreign students who arrive in the United States on F-1, J-1, M-1, Q-1 or Q-2 visas are considered to be exempt individuals during the first five calendar years of their physical presence in the United States.

F-1/CPT (Curricular Practical Training)

When a foreign nonresident alien resides in the United States as an F1 student, they are limited to the type of employment they can have and typically are limited to three categories of employment. 

The first category is referred to as curricular practical training.

As provided by ICE:

• • • CPT is integral to your major and the experience must be part of your program of study.

    • When you enroll at the graduate level, your designated school official (DSO) may authorize CPT during your first semester if your program requires this type of experience. Ask your DSO for details.

    • Your DSO will provide you a new Form I-20, “Certificate of Eligibility for Nonimmigrant Student Status,” that shows that the DSO has approved you for this employment.

    • You can work on CPT either full-time or part-time.

    • CPT requires a signed cooperative agreement or a letter from your employer.

    • If you have 12 months or more of full-time CPT, you are ineligible for OPT, but part-time CPT is fine and will not stop you from doing OPT.

F-1/OPT (Optional Practical Training)

Unlike CPT, OPT or optional practical training is much more common.

As provided by USCIS:

Types of OPT

All OPT must be directly related to your major area of study. If you are an F-1 student, you may be eligible to participate in OPT in two different ways:

• • • Pre-completion OPT: You may apply to participate in pre-completion OPT after you have been lawfully enrolled on a full-time basis for one full academic year at a college, university, conservatory, or seminary that has been certified by the U.S. Immigration and Customs Enforcement (ICE) Student and Exchange Visitor Program (SEVP) to enroll F-1 students. You do not need to have had F-1 status for the one full academic year; you can satisfy the “one full academic year” requirement even if you had another nonimmigrant status during that time.

      • If you are authorized to participate in pre-completion OPT, you may work part time (20 hours or less per week) while school is in session. You may work full time when school is not in session.

• • • Post-completion OPT: You may apply to participate in post-completion OPT after completing your studies. If you are authorized for post-completion OPT, you may work part time (20 hours or less per week) or full time.

      • If you participated in pre-completion OPT, USCIS will deduct that amount of time from your post-completion OPT authorization period. For example, if you participated in 10 months of pre-completion OPT, you would be eligible for only up to 2 months of post-completion OPT.

Post-5 Years Tax & FBAR

Once a person has resided in the United States for more than five years on an F1 visa, they no longer receive the five-year exemption from US person status. That means the taxpayer can now become considered a US person under the substantial presence test – presuming the test is met – and requires these individuals to report their worldwide income as well as disclose their overseas accounts, assets, and investments on one or more international information reporting forms. The failure to properly report this information may lead to significant fines and penalties although the internal revenue service has developed several international tax and reporting amnesty programs to assist taxpayers with safely reducing, avoiding, or eliminating penalties.

About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm today for assistance.