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For tax purposes, I am a Resident Alien i.e. I’ve been in the United States for more than five years (’substantial presence’) and I’m on a F-1 visa i.e. a student visa. Those on a H1-B visa are also considered as Resident Aliens even though they might have been here for less than five years (but at least for 183 days). Resident Aliens use Form 1040 to file their tax returns and if you like me, do not own a home yet then you probably will use just the standard deduction and not itemize them (using Schedule A & B). So basically, I’m armed with my W2 that I get from my on-campus employer and since I’m the savings sort, I have a 1099-INT that lists interests accrued from my savings account (taxable if more than $12). Now, you may be more financially saavy (or capable) and might have invested in stocks. If so, you might also have 1099-OID if you have earned dividends on your investments. Usually, these are the standard incomes we, of comparable tax status, declare on our tax forms. You may also have Business Income (line 12) if you were an independent contractor and received a 1099-MISC. Additionally, you may choose to declare online income (Adsense, etc.) in Other Income (line 21) but beware, this ‘other income’ may be in violation of your visa status. But as I understand, IRS and the BCIS generally do not talk to each other and your immigration status doesn’t matter for your tax filing purposes (photo credit: Peggy Archer).
The real trick in reducing your taxable income is in claiming deductions that helps you save hundreds and I’ll list some that can be viable. If you are a non-resident alien, then I’m sure your university has sent you an username and password to CinTax, the software that makes filing your returns easier.
Standard Deductions
Deductions are basically credits offered by the government to deduct from your total income. You pay income tax only on your taxable income i.e. amount calculated after claimed deductions. Depending on your filing status (line 1-3), your standard deduction (line 40) can range from $5,350 to $10,700. Your filing status depends on your marital status and if you are filing separately or jointly. Although I’m married now, I filed separately since Ash’s tax returns involve change in immigration status and it would unnecessarily complicate things.
Another deduction involve exemptions (line 6a-c) and entail claiming your spouse or any dependents on your return. You can claim yourself in the exemptions and claim $3,400 as a deduction as long as your income is not more than $117,300 and I doubt for any F1 student it is. You can claim another $3,400 for your spouse if he/she has not had any income and subsequently additional $3,400 for each child you have.
As you might see, even if you are single you can claim at least $8,750 as a deduction. So if you have earned less than that, your taxable income is effectively zero and you pay no tax (but still have to file the return). But is this all you can deduct?
Additional Deductions
If you notice on Page 1 of Form 1040, after you calculate your total income on line 22 the next section on adjusted gross income offers several more deductions. I’ll highlight a few that a Resident Alien on an F-1 visa can claim
Moving Expenses (line 26)
If you have moved in the previous year then you may be able to claim those expense as a deduction. You have to fill Form 3903 [PDF link] first to see if you can claim such a deduction. You can claim expense for transportation and storage of household goods and personal effects as well as travel expenses (including lodging but excluding meals) from your old home to the new one. So keep those Best Western, U-Haul, and Mover Help receipts safe. However, if your employer has compensated you for moving expenses then you cannot claim them unless that compensation is less than what you spent. Update: Gawker points out that you can claim this deduction only if the move is more than 30 miles away.
Penalty on early withdrawal of savings (line 30)
Well, you might have had a windfall and got yourself a savings bond but then suddenly things turned sour and you needed to break that bond to get your money out. On top of that, your financial institution levies a penalty. But fret not, you can claim that penalty as an exemption on your tax return partly softening the blow.
Alimony Paid (line 31a)
I hope none of you have to claim this deduction and you have happy married life. Well, in case things go south and you end up paying your spouse alimony on top of your meager income, you can claim that as a deduction and not have the government screw you as well. But you have to let Uncle Sam know of your spouse’s SSN so that they can tax them for that ‘income’. Sweet revenge, eh?
Student Loan Deduction (line 33)
Let us be honest, not all of us can afford our graduate school education and we might not have rich parents as well. But for an investment like education, a loan is justified, right? In fact, the government also prefers that you go back to school and get retooled for the changing economy. So it offers you exemption from any interest you pay for a student loan. But as with any government largess, there is a caveat. You cannot claim more than $2,500 in interest as a deduction. So the government prefers you graduate soon to pay off your loan and not languish forever on campus.
Tuition and Fees Deduction (line 34)
This is a new one in 2007 or at least I didn’t see it last year. And I used this line to save me quite a bundle so pay attention. Apart from your loan, your government is sympathetic to the tuition and fees you pay in retooling your future. You must first fill our Form 8917 [PDF link] to see if you qualify. Also, make sure your university gives you a 1098-T that lists your qualifying tuition. You cannot attach your credit card or bank statement to show how much you forked out for that Masters no one in the job market needs. Mind you, you have to deduct any scholarship or grant amounts (box 5) that are mentioned on your 1098-T from qualified tuition and related expense (box 2) and if you have received any reimbursements for the fees you paid, you must deduct that too. Read the instructions on Form 8917 on who can take a deduction and what expenses qualify.
Again with the caveat, you cannot claim this exemption if your gross income after claiming other exemption is more than $80,000 and if this income is not more than $65,000 then you can claim your qualified tuition expenses or $4,000 (whichever is smaller) else you can claim your qualified tuition expenses or $2,000 (whichever is smaller). I know this part is confusing so it is best if you use Form 8917 and enter your numbers.
Other deductions
There are other deductions you can claim in addition to the ones I mentioned and I would recommend going line by line in Form 1040 [PDF link] to see what applies to you (it is just a two-page form). Other credits include child and dependent care expenses, elderly care expenses, child tax credit, education, and residential energy credit but I’m assuming they aren’t applicable for most of the cases that this post seeks to help. You have to also declare any foreign income if you file a Form 1040 so I’m assuming you’ll be doing that :)
I hope this little recommendation guide helped. Feel free to correct me if I have erred in describing anything. I’ve not mailed in my tax return yet (no hurry since I owe Uncle Sam and the deadline is April 15) so I can still make changes. Happy Tax Time.
by Patrix | on Friday, February 22nd, 2008 at 1:10 pm | 
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February 22nd, 2008 at 1:41 pm
this is fantastic!! and very helpful. (although i don’t like the google ads on your blog :(
February 22nd, 2008 at 2:06 pm
Jinal, sorry about the Google ads but you wouldn’t see them if you read off the front page or through the RSS feed. Glad you found it helpful although am sure you might know more about this.
February 22nd, 2008 at 9:30 pm
I might be wrong but I thought you can only deduct moving expenses if the move is more than 30 miles from your previous residence. I used this deduction on my last move but can’t during this move because it’s less than 30 miles.
Also you missed one huge tax deduction : Home owner’s deduction : Any interest you pay on your mortgage is deductible. This is especially huge during the first few years of owning a home. I will be able to use this one next year. Can’t wait for it.
February 22nd, 2008 at 9:37 pm
Gawker, Ah! I must have missed that 30 miles criteria. Is it also applicable if you take a roundabout route?
And of course, the home owner’s deduction is the big one but if you want to take that, then it is better to go with itemized deductions instead of the standard deduction, right? I think I mentioned that at the top.
February 22nd, 2008 at 10:09 pm
By the way what is this standard deduction / itemized deduction nonsense? I have never understood it.
February 22nd, 2008 at 10:43 pm
Turns out I was wrong. It’s 50 miles and only if your move is work-related. Plus there are other conditions. Here’s a document
February 23rd, 2008 at 11:15 am
Gawker, kya re…do your research first :)
Anyway, about the standard vs. itemized deductions, from what I understand is that the former gives you one round figure that you can use to claim a lumpsum deduction whereas if you have more expenses the government lets you claim deduction for then it is better to itemize them.
You must have heard or seen the scramble for receipts as the tax season gets close. This is probably to file any such expense as business expense e.g. the printer you got for your daughter’s high school project can be palmed off as for the small business you claim to run from your garage and thus be deducted from your income. The itemized deductions contain the big-ticket items like medical expenses, local and property taxes, home mortgage interest, mortgage insurance premiums, gifts to charity, etc. Being a homeowner, you’ll have to do this next year so better get a head start on trying to understand this.
February 23rd, 2008 at 11:47 am
Great post Patrix! Thanks so much!
February 23rd, 2008 at 1:28 pm
[...] has an informative post on different deductions available to resident aliens, Deductions are basically credits offered by the government to deduct from your total income. You [...]
February 23rd, 2008 at 3:01 pm
Interesting post. I have always gone through an auditor though :) You are correct about home owners being better off itemizing, that’s what we do..one other thing is, if you are a homeowner, any home improvement purchases (like purchasing drapes) can also be added to the cost basis of the home..
Are you sure the tuition fees deduction was only in 2007? I thought it was there earlier too..
February 23rd, 2008 at 3:46 pm
I’m sure u havent, but don’t forget the economic stimulus thing this year..
http://www.irs.gov/newsroom/article/0,,id=179181,00.html
February 23rd, 2008 at 6:57 pm
TGFI, You’re welcome. Hope it saves you some.
Lekhni, Yup! Being a homeowner has its perks. But that kind of a tax code has had its effect on defining our urban structure and social demographics. Regarding the tuition fees deduction, I checked last year’s form and I couldn’t see it at least not in the same place.
Sqrl, of course! $600..woo hoo! Watch me stimulate the economy (not!) when I use that to pay off my credit card debt.
February 24th, 2008 at 8:27 am
is income for phd students also taxable in usa , i heard it is very meagre salary for phd students in usa 1700$/month or so , what will you be left if this is also taxed how can you run a family raise children with this salary, over that taxes also and over that to break head on phd also ayyo rama
February 26th, 2008 at 12:49 pm
to start with - thanks. will respond with more after I digest all this. i really want to avoid going to H&R block.
February 26th, 2008 at 3:36 pm
PhD, of course it is. And as long as you earn more than the tax exemption limits, you gotta pay your dues to Uncle Sam. And if you have a spouse and children, you get more exemptions. Life isn’t fair, I know.
Hawkeye, I went to H&R Block the first year I turned Resident Alien (sounds like a sci fi movie) but later realized that we could easily do this on our own. After all, it is just two pages (and supplementals).
March 6th, 2008 at 12:26 am
[...] who are considered Resident Aliens for tax purposes by the IRS, you might be interested in extra deductions that you can claim to increase your [...]
March 22nd, 2008 at 7:53 pm
hey thanks, this post is very useful! :)