Today, I was asked by a friend who is a new comer to a graduate-level program: Can you give me any guidance about taxes? Do we have any sort of treaties for reduction, or how did you manage taxes here? What should I expect to pay in general?
Rephrasing his question, What is the deal with all this tax bullshit they told us about in the student orientation?
So, I replied to his email and my reply looked so long that I thought it would benefit some confused new comer out there. While this is not a financial advice, I just describe what the terms you will hear/read everywhere mean.
Don’t get scared and don’t worry about taxes. You will know when it is time to take action.
Some Types of Taxes
If you are coming from a country that didn’t require you to sort out your taxes (just like my country - Egypt), you will most probably be confused similar to how I was in my first few days in the US. You go to a grocery store to buy something, and at the cashier, you find yourself paying a little bit more than the price tag on the item. Welcome to Sales Taxes.
If you are coming from a country that you can live in without a car and feel free to navigate a city using public transportation or a bike, you will most probably be challenged in the US, especially if your school is in a city that doesn’t have basic transportation services. If you drive, your first thought would be: I will buy a car. Welcome to Property Taxes.
If you are sponsored by your university (e.g. Fellowship, Research Assistantship, Teaching Assistantship) or a US-based scholarship (e.g. Fulbright), you basically have US income. And for that, I would like to welcome you to Income Taxes - the largest headache.
- These are taxes collected by the state you live in on any purchase transaction that happen within its borders.
- Everything is taxed. Food, clothes, electronics, services, …etc.
- It can be 0% in some states, but ranges between ~2% to ~10% in most of the other states. See this map.
- Only unprocessed food and food surplus are not taxed. For example, raw meat, vegetables, essential oils, and so on. They are considered a life necessity and are note taxed.
- If you are buying from local groceries, you will find that whatever the price you see is what you pay at the end. Walmart, Stop and Shop, Safeway, QFS and all other big grocery shops will tax almost everything (even raw food) as they are considered processed/packaged food.
- But what if I’m buying from online service like Amazon? How is tax calculated? Answer: it is complicated. See this
- These are taxes collected by the state on selected possessions that you own within the state borders.
- They are collected yearly, and you will get a mail at home.
- Basically, when you buy a car, you will pay yearly taxes - PLUS the sales tax at the time of the purchase. If you are buying from a private party (not from a dealer), you will pay the sales tax at the DMV when you register the vehicle.
- If you own a house, a store, a garage, a backyard, …etc, you will pay as well. But I don’t think as an international student, you have any of these.
The source of all headache. Let’s go!
There are two entities that come after you yearly and take a piece of your cake (income). Let me introduce you to:
- The Federal Government: represented by the Internal Revenue Service (IRS). Remember this name as you will find it everywhere.
- The State Government: represented by the Department of Revenue Service (DRS) or Deparatment of Taxation (TX), or Department of Revenue, or … oh! Each state has its own name for their representative.
What cake are they cutting from?
Your personal income.
A Personal Income is any money that you receive during the year. Sources include a full-time job, a part-time job, a consultancy job, awards, fellowships, scholarships, bank account interest, investments earnings, driving for Uber, selling services online, or basically anything that gets in your pocket (or bank account) and qualifies as personal income.
A Year is calculated from January 1st to December 31st.
- If you are not a resident, your visa (which is expected to be F-1 or J-1) limits your income options. From all the above sources, you can only work for the sponsoring institution (your university) and you CANNOT receive money from any other job, unless it is permitted on your I-20 or DS-2019 (e.g. internships).
- Your employer (sponsoring institution) maintains a record for all the money that it transfers to you during the year.
- In January the year after, your employer send you a form called W-2.
- The W-2 form includes every penny that got transferred to you, and it marks if there are any taxes deducted for the federal and/or state government on behalf of you.
- Tax reporting season starts from January to Mid April for people to report their income for the preceding year.
- You collect all your W-2 forms from your employer(s) and start seeing how much you got paid and how much of that was already held for federal or state taxes.
- This is done by filling some forms, which tell you at the end if you still owe money to the government to pay or your employer actually overpaid your taxes and you should get some tax refund.
- You usually prepare these forms through a certified accountant (e.g. companies like H&R Block), or use online software tools.
- Some universities provide a free tool to prepare your federal tax forms but not the state tax forms. For state taxes, another paid service is called Sprintax can be used.
- Depending on your source of fund, some institutions don’t hold any taxes on behalf of you. Some are required to do so.
- In any case, you have to report your income during the tax season and see how much you owe the government or vice versa.
How to prepare the tax forms?
Do yourself a favor and find a certified service to fill in the forms for you and co-sign them, especially in the first year. Tax forms are complicated, and they are complicated on purpose. They don’t want people to mess up with them and report false income. You also don’t want to get audited years later. It might be bad for your immigration record.
- There are tax treaties between the US and some other countries. Basically, a tax treaty says: the federal government will NOT collect taxes on the first $XXX.XX income in a given year. This holds true for the first
Nyears you stay in the US. After
Nyears, you can’t get this treaty. Example, if the tax treaty is for $3,000 and your yearly income has been $20,000, it means that the federal government will take taxes on $17,000. It does not mean that you are getting $3,000 in taxes back.
- Your sponsoring institution might consider this for the first payment if you marked that you qualify for a treaty when you check in with their business office. Otherwise, they will tax this income and you will figure it out when you do your tax reporting.
- If you have a family (spouse and/or children), you include them in your tax reporting during the tax season as you are considered responsible for the family and you shouldn’t pay the same taxes as a single person. You will most probably find that the government owe you money and will get a refund.
- Any other form of tax benefit you see or read online (e.g. school supplies, medicare, ..etc.) does NOT apply to foreign citizens; only applies to Americans. So, don’t spend time looking for what can get you more money back. And don’t get scammed by accountants during the tax season who say that they can do the taxes for you and get you more refund than the other company. They don’t know what forms to fill in.
But how much do governments tax us?
- Depends on the personal income and the family that you are responsible for.
- See https://smartasset.com/taxes/income-taxes to get an idea.
In January of every year, you will get a form that says how much you earned and you will get instructions on how to file your tax forms for the federal and state governments. Forget about the above text.
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