Many of us come to the US in the later half of the year and because in such cases we are in the US for less than 180 days of that financial year, we are called non-resident aliens for that financial year. Alien because we are not the citizens of the US and non-resident because we were here for less than 180 days of the financial year. The income tax filing for non-resident aliens differs substantially from that for resident aliens. If you want a peace of mind and an assurance that you will be the last person to receive a notice from the IRS, which is the US income tax department, it's important to stick to the basic rules of income tax for non-resident aliens. Some $500 of risky extra return will not benefit as much as the toll a notice from the IRS will take on your mental and financial health. All these rules can be dug out from the official site of IRS, which is of course not a very attractive time pass for most.
When I approached several of my colleagues and friends for guidance on how to go about filing my IT return here, the most common piece of advice I got was to go for a consultant of indian origin, labeled 'Desi Consultants'. Apparantly, they help you get more refund and charge less than the local ones. I talked to three such desis and smelled something fishy - each one was getting me a high refund in the same ballpark but interestingly, the heads under which the refunds were coming were different with each. This made me research over this for almost a full day if I add up the number of hours put in different days. I called up IRS and other tax consultants several times and sacrifised a few hours of my life reading the IRS website. Eventually, what I found out was somewhat startling.
I know some half dozen colleagues (from previous years too) who came in Oct/Nov of the year and were a non-resident alien for that year. They all e-filed their claims through desis, using the form 1040. Moreover, these consultants applied standard deductions on their gross earnings which easily brought their federal tax liability down to zero. The same has recently happened with one colleague this year too. As follows, all the above bold faced approaches are not applicable to non-resident aliens.
- Surprisingly, the IRS says that non-resident aliens should fill form 1040NR (NR stands for non-resident, and doesn't defy common sense) or form 1040NR-EZ (EZ pronounced as easy). E-filing of both these forms, i.e., for non-resident aliens has been discontinued by the IRS from some time now. Only paper filing is done for them.
- Moreover, IRS says that standard deduction is not applicable to non-resident aliens. Only itemized deductions can be claimed with various expenses clearly mentioned.
- And even the itemized deductions has an upper limit of 30% of your adjusted gross income (AGI).
- Effectively, no non-resident alien can escape paying at least some federal income tax. Though there is one case of very low income where this is possible and I have explained that in the points in the closing paragraph of this post. (Don't be too hopeful though, for average income group in all probability, that would apply only if you came in December)
The desi consultants I talked to are either not aware of this or are not admitting this. They still assure me of a 100% federal IT refund with standard deduction using the form 1040 that is not even meant for me. All of them, without fail, brought my fed tax liability to zero. Some are even getting me an 'Earned income credit' or 'Recovery rebate credit' which in such cases will be almost a fraud.
Sites like turbo tax, etc. in their free e-filing process with form 1040 show me both types of deductions - standard and itemizes and flatly suggest I go with the higher of them. But then 1040 is for residents and they may have a choice in deciding the kind of deduction applied.
Now, I am not a prissy pedant abiding the law to the nth detail but I at least don't want to receive any IRS notice for violation of the basic income tax rules while I concentrate on better things at ISB.
To close with, let me write down a rough way to calculate the federal IT refund for non-resident aliens:
- You wouldn't get any refund from social security tax and medicare tax, if you have paid them.
- You would get refund only against federal income tax and state income tax.
- Note down your adjusted gross income (AGI), which is nothing but the gross income that you got in your pocket (as against the annual gross income)
- In all probability, you have incurred expenses towards house rent, internet, utilities, laundry, and laptop for official use (if you use it for personal purpose too, you can specify a percentage usage towards official use). Itemized deduction can be claimed against those expenses but only to the extent of 30% of your AGI. And to be in the risk free zone (not to invite an IRS notice), a good tax consultant will claim some amount between 29-30% of your AGI under this head.
- For singles, an additional $3500 is deducted flat from AGI (I am not sure about the name of this head). This amount for married people, whose spouce was with them in the US for most part of that period, is $7000. This deduction brings your federal taxable income down to zero if as a married person, your AGI was about $10,000 ((100-30)% of 10,000=7000) and as a single, your AGI was $5000 ((100-30)% of 5000=3500).
- After deducting the above two heads, you pay a tax on the rest of your income. The tax rate depends on which slab you come in. The minimum is 10%.
- One consultant that I found following all those nitty gritty is IBSN.
I hope this information is of use to those who bother to do some research before filing with any idiot. Gotta be careful in financial matters in a foreign land.
