Conquering Student Taxes: A Step-by-Step Guide for OPT Students

Filing your taxes correctly as an international student on Optional Practical Training (OPT) in the United States is a crucial aspect for your financial management. While it may not be the most exciting aspect of your student life, failing to comply with tax regulations can have severe consequences. This comprehensive guide aims to help you navigate the complex world of taxes for OPT students, ensuring that you understand your obligations and rights.  OPT is an opportunity for international students under an F-1 visa to work in the US for up to 12 months after graduation. STEM (Science, Technology, Engineering, and Mathematics) students can extend this period for an additional 24 months. It is essential to understand tax filing requirements and your tax responsibilities to avoid any future complications with visa or Green Card applications, as well as potential fines and penalties.

Understanding OPT

Optional Practical Training (OPT) is a program that allows international students to gain practical experience in their field of study while in the United States. There are three types of OPT:

1. Pre-completion OPT: This type of OPT is authorized before graduation if Curricular Practical Training (CPT) is not an option. Students can work part-time, during their university semester, and the work experience must be directly related to their area of study. This option allows students to gain valuable practical experience while still pursuing their degree.
2. Post-Completion OPT: This is the most common type of OPT. It is authorized for 12 months after graduation. This period provides recent graduates with an opportunity to gain hands-on experience in their field of study and potentially secure a long-term job in the United States.
3. STEM-extension OPT: This is a 24-month extension for students who have completed a degree in a STEM (Science, Technology, Engineering, and Mathematics) field. This extension recognizes the importance of retaining highly-skilled STEM graduates in the United States workforce and allows them to continue gaining practical experience in their respective fields.

Tax Obligations for OPT Students

If you earn income while participating in the OPT program in the United States, you are required to pay both federal and state income taxes. It is crucial to file your tax returns by the deadline, which falls on April 15th each year. Failure to file your taxes on time can lead to serious consequences, including issues with future Green Card and visa applications, as well as fines and penalties. It is essential to understand that your tax obligations do not end with the completion of your OPT program. Even if you have returned to your home country, you may still be required to file tax returns for the period you worked in the United States.

Residency Status for Tax Purposes

Determining your residency status for tax purposes is a critical step in understanding your tax obligations. Generally, a graduate or student in F-1 status who has been in the USA for less than five years is considered a nonresident alien for tax purposes. This status has specific tax implications, including the potential to claim certain deductions and credits. If you have been in the USA for more than five years, you will typically be considered a resident alien for tax purposes. This status may also impact your eligibility for certain tax benefits and deductions.

It is important to note that the residency status determination is based on a complex set of rules known as the "Substantial Presence Test." This test is used by the Internal Revenue Service (IRS) to determine whether an individual is considered a resident or nonresident for tax purposes. The Substantial Presence Test is based on the number of days you have been present in the United States over a specific period. The test applies a formula that takes into account the current year and the two preceding years. Here's how it works:

1. Current Year: All days present in the United States during the current tax year are counted.
2. First Preceding Year: One-third of the days present in the United States during the first preceding year are counted.
3. Second Preceding Year: One-sixth of the days present in the United States during the second preceding year are counted.

If the total number of days present in the United States, calculated using the formula above, equals or exceeds 183 days, you are considered a resident alien for tax purposes. If the total number of days is less than 183, you are generally considered a nonresident alien.

However, there are certain exceptions and special rules that may apply, depending on your specific circumstances. For example, individuals who are present in the United States for fewer than 183 days during the current year can still be considered residents if they meet the Substantial Presence Test for the preceding two years.

Additionally, certain categories of individuals, such as students on F, J, M, or Q visas, are exempt from the Substantial Presence Test during specific periods, provided they meet certain conditions.

Tax Rates for OPT Students

The Internal Revenue Service (IRS) requires federal income tax withholding on all U.S. source payments to nonresident alien students. OPT students, as well as individual students, are taxed on their wages at graduated rates from 10% to 37%, depending on their income level. This means that the tax rate increases as your income increases.

In addition to federal taxes, you may also have to pay state tax on your income, depending on where you live in the U.S. and your personal circumstances. Each state has different rules involving their tax laws, and it is essential to familiarize yourself with the specific regulations in your state of residence. It is worth noting that there are nine states that do not charge tax on income: 

• Alaska
• Florida
• Nevada
• New Hampshire (taxes only investment income, not earned income)
• South Dakota
• Tennessee (taxes only investment income, not earned income)
• Texas, Washington
• Wyoming.

 If you reside in one of these states, you may be exempt from paying state income tax. 

The tax percentage withheld on scholarships and grants for F-1 and J-1 visa holders is 14%. If you receive any scholarships or grants, it is important to understand the tax implications and ensure that you comply with the relevant regulations.

Tax Exemptions and Deductions

As an F-1 visa holder, you are exempt from FICA (Social Security and Medicare) taxes, unless you've been in the United States for more than five years. This means that no matter whether you are doing OPT, OPT extension, or CPT (Curricular Practical Training), you are exempt from paying Social Security and Medicare taxes.

As a nonresident, you may be eligible for various tax deductions. While there is no specific OPT tax relief, you may be able to claim the following credits should you qualify for them:

• Child tax credit: The child tax credit is designed to provide financial assistance to families with qualifying children.
• Child and dependent care tax credit: If you have paid for childcare or dependent care expenses to enable you to work or look for work, you may be eligible for this credit.
• Foreign tax credit: If you have paid taxes to a foreign country on income that is also taxable in the United States, you may be able to claim a credit to offset the U.S. tax liability.
• Retirement savings contribution credit: This credit is designed to encourage low- and moderate-income taxpayers to save for retirement by providing a tax credit for contributions to qualified retirement plans.
• Credit for other dependents: If you have dependents who do not qualify for the Child Tax Credit, you may be eligible for this credit.
• Adoption credit: If you have adopted a child, you may be eligible for a tax credit to offset some of the adoption expenses.

It is essential to carefully review your specific circumstances and consult with a tax professional, if necessary, to determine your eligibility for these deductions and credits.

Must read: Everything you need to know about Tax Credits and Deductions

Filing Tax Returns as an OPT Student

As a student, you will need to file Form 8843 and 1040NR. Form 8843 is the "Statement for Exempt Individuals and Individuals with a Medical Condition," which is used to claim exemption from the Substantial Presence Test for determining residency status. Form 1040NR is the "U.S. Nonresident Alien Income Tax Return," which is used by nonresident aliens to report their income and calculate their tax liability. There are various tax preparation software options available specifically designed for nonresidents.  Although software programs can simplify the process by guiding you through a series of questions to estimate your personal circumstances, determine your residency status, and prepare the necessary tax forms. It is important to consult a professional tax preparer  to ensure that you accurately report all relevant information. If you are unsure about any aspect of the tax filing process, it is always advisable to seek professional assistance to avoid any potential errors or omissions.

OPT to H-1B Tax Filing

If you transition from OPT to an H-1B visa, it is important to understand the tax implications of this change. H-1B status is not exempt from the Substantial Presence Test, and very often, H-1B visa holders become residents or dual-status residents in the year of visa change.

Depending on your personal circumstances, as an F-1 student on OPT, you may have been able to claim a tax treaty that can partially reduce or fully exempt your income from paying taxes. However, H-1B visa holders must pay FICA tax (Social Security and Medicare taxes) and are usually not entitled to use tax treaty benefits for students and scholars. It is essential to familiarize yourself with the specific tax requirements and regulations when transitioning from OPT to an H-1B visa. Consulting with a tax professional or referring to the IRS guidelines can help you understand the potential changes in your tax obligations and ensure compliance.

Tips for OPT Students Starting a New Job 

When starting a new job as an OPT student, it's crucial to understand your tax obligations. Here are some key tips:

1. Know your residency status: Familiarize yourself with your residency status so that you can claim any applicable reliefs based on your country of origin. This information will also help you understand the specific tax forms and requirements that apply to your situation.
2. Fill out tax forms: Update your withholding status by filling out tax forms for your new job. This includes completing a W-4 form, which is used by employers to determine the appropriate amount of federal income tax to withhold from your pay.
3. File previous tax returns: If you missed filing a tax return for a certain previous tax year, it is advisable to file one as soon as possible. This will ensure you are tax compliant for that tax year and allow you to claim any eligible refunds or credits.
4. Review tax treaty benefits: If you are eligible for tax treaty benefits based on your country of residence, review the specific provisions and requirements to ensure you are taking advantage of all available deductions or exemptions.
5. Keep accurate records: Maintain detailed records of your income, expenses, and any other relevant information that may be required for tax filing purposes. Good record-keeping will make the process smoother and more accurate.

Tax Refunds for OPT Students

OPT students can be entitled to a tax refund when they file their tax returns. Each year, thousands of OPT students overpay taxes in the USA due to various reasons, such as incorrect withholding calculations or eligibility for deductions and credits. The amount of your potential refund will depend on your specific circumstances, including your income, deductions, and tax treaty benefits (if applicable). It is crucial to file your tax returns accurately and on time to ensure that you receive the maximum legal refund you are entitled to. While the average federal tax refund amount can vary from year to year, it is not uncommon for OPT students to receive refunds in the range of several hundred or even thousands of dollars.

Form W-9 for OPT Students

Sometimes, an OPT participant may become a resident for tax purposes. In this case, you will need to complete a W-9 form (Request for Taxpayer Identification Number and Certification) and provide it to your employer. The W-9 form is used to request a taxpayer identification number (typically a Social Security number) and certification from a U.S. person or entity. Completing the W-9 form accurately is crucial, as it ensures that your employer withholds the correct amount of taxes from your paycheck. Providing incorrect information on the W-9 form can lead to potential penalties and complications with your tax filing. If you are unsure about your residency status or have questions about completing the W-9 form, it is recommended to consult with a tax professional or refer to the IRS guidelines.

Conclusion

Navigating the tax landscape as an international student on OPT can be complex, but understanding your obligations and rights is crucial. This comprehensive guide has covered the key aspects of OPT taxation, including residency status, tax rates, exemptions, deductions, filing requirements, and the transition from OPT to H-1B visa. It is essential to stay informed and up-to-date with the latest tax regulations and changes. Consulting with a qualified tax professional like NSKT can help ensure that you are complying with all applicable tax laws and maximizing your potential deductions and credits. Remember, failing to file your taxes or providing inaccurate information can have serious consequences, including potential fines, penalties, and complications with future immigration applications. By understanding your tax obligations and taking proactive steps to comply, you can avoid these issues and focus on your studies and professional growth.