When you the owe the tax man: a guide for IMGs
How to determine whether the IRS considers you a resident or nonresident alien-and other tax tips
From the March 1997 ACP Observer, copyright © 1997 by the American College of Physicians.
By Charles J. Solcher, CPA, JD, and Mary Allen
Exactly how much International Medical Graduates (IMGs) owe in taxes is an individual matter dictated by complex treaties between the United States and the IMG's home country.
The complexity mounts because these treaties differ from country to country, so the tax obligation of IMGs depends on their home country and details of the treaty that have been negotiated with the United States. Plus, arcane definitions of exactly who is and isn't considered a resident only add to the quandry.
So it's no wonder that tax time can be particularly vexing for the growing number of IMGs in the medical workforce—nearly a quarter of all medical residents in the United States, and in some states more than half of all physicians in training.
As a result of the complex rules, IMGs can find themselves in one of many income tax categories. But with a little help from the right tax forms and publications—as well as information readily available on the Internet—IMG housestaff can identify the tax category that applies to them—and fulfill their obligation to the Internal Revenue Service (IRS).
For starters, IMGs' country of origin will determine how the IRS treats them. There are two categories of IMGs: those who come from countries that have signed tax treaties with the United States (treaty-based IMGS) and those who come from countries that have not signed tax treaties with the United States (non-treaty-based IMGs).
To find out whether your home country has signed a tax treaty with the United States, refer to IRS Publication 901, also known as "U.S. Tax Treaties." If your home country is listed, you will be taxed according to provisions in your country's tax treaty with the United States. If your home country has no treaty, your tax obligation will be determined by the Internal Revenue Code.
If your home country has a tax treaty with the U.S., that treaty takes precedence over U.S. tax law. In addition to listing the countries that have tax treaties with the United States, Publication 901 also lists the types of income that are taxable and the types of income that are exempt from U.S. income tax.
For example, Publication 901 explains when expenses paid by U.S. sources like teaching hospitals can be excluded and when they can't. Treaties sometimes state that expenses such as room and board can be tax exempt only if paid by a foreign source—the IMG's parents, for example—and not by an American source like a teaching hospital.
IMGs typically get most of their income from two categories: pay from studying and training or scholarship and fellowship grants. Publication 901 states whether those types of income are exempt from U.S. taxes, how long the income is exempt and the maximum amount of income can be considered exempt. For an idea of how IMGs from different countries can benefit from tax treaties, see the chart that compares items from the Indonesia and Pakistan treaties.
To get a copy of your country's tax treaty with the United States and related treasury decisions, refer to table 3 in Publication 901 and look for the citation section. There you will find a list of Cumulative Bulletins, which will guide you to specific treaties.
The reference for Japan, for example, is 1973-1 C.B. 630. This cryptic code means that the U.S. Treasury Cumulative Bulletin from 1973, Vol. 1, page 630, contains the text of the tax treaty signed by the United States and Japan. Next, on page 653, you'll find the Treasury Decision section, which contains an explanation of the treaty from the U.S. Treasury Department.
These treaties are difficult to read, but they provide the actual language that dictates how IMGs from that particular country are taxed. Copies of the Cumulative Bulletin are available at most university libraries or from the Internal Revenue Service.
To simplify the discussion, take a look at the tax treaty signed by Japan and the United States. It shows that for Japanese IMGs, certain types of income are exempt from U.S. tax. They include:
- Remittances and Allowances. This exemption covers funds used to pay for an IMG's meals and lodging for five years only if the expenses are paid for by a foreign source such as the IMG's parents. If these expenses are covered by a U.S. source like a teaching hospital, the exemption cannot be used.
- Training and Studying. IMGs can exempt $2,000 in earnings for training and studying from U.S. taxes for five years. The income can come from either a foreign or U.S. source.
- Scholarship or fellowship grant. Scholarships or fellowships paid by either a foreign or U.S. source are also exempt from U.S. tax for five years.
Take the case of Japanese IMGs. They are allowed to deduct more than one personal exemption if their spouse or children are living with them in the United States. (This provision is specific to the Japanese treaty and varies with other treaties.)
The Japanese treaty allows IMGs to deduct their first $2,000 of income received from a hospital, and for five years all other income is not subject to the 7.65% employment tax. Once that five-year period has expired, however, Japanese IMGs lose most of these exclusions and have to pay a full range of taxes. After five years, IMGs need to file a regular Form 1040 and will be subject to employment taxes.
To qualify for any of the above exclusions, IMGs must file Form 8833, "Treaty-Based Return Position Disclosure under section 6114 or 7701 (b)," for each exclusion that they declare under their tax treaty. Failure to disclose this information can result in a $1,000 penalty.
IMGs whose home country does not have a tax treaty with the United States, referred to as non-treaty-based IMGs, face a slightly more complex process in determining their tax obligation. One of the most important distinctions is whether the IMG is a nonresident alien or a resident alien.
Most IMGs enter the United States on temporary J-1 visas issued by U.S. Immigration and Naturalization Service (INS). When it comes to paying taxes, however, IMGs may find that the IRS does not always use the same classification as other government agencies. For example, an IMG may be considered a nonresident alien by the INS but a resident alien by the IRS for tax purposes.
There are tax advantages to being considered a nonresident alien. Generally, nonresident aliens have smaller tax burdens than resident aliens because they do not have to pay employment—or Social Security—taxes. Resident aliens, on the other hand, are subject to employment taxes on all earned income of approximately $60,000. (The actual number changes slightly from year to year with inflation.)
The primary factor that determines residency status is the "substantial presence" test. Most aliens who have resided in the United States for more than 183 days are automatically classified as a resident alien for tax purposes, regardless of their immigration status. If IMGs meet the substantial presence test or have applied for permanent residency, they are automatically classified as resident aliens for tax purposes. IMGs with a "green card" are also considered resident aliens.
But because IMG housestaff are being trained for a profession, they may exclude the days they spend in the United States as a trainee and possibly avoid meeting the terms of the substantial presence test. This exception can be used for up to two years, but IMGs may not use the exemption if they were in the country during any portion of two of the preceding six years. For example, an IMG in his third year of residency probably cannot take the exemption; there is a good chance that his tax status has changed from nonresident alien to resident alien.
To qualify for this exemption, IMGs must file form 8843 ("Statement for Exempt Individuals and Individuals With a Medical Condition") along with their 1040NR by April 15 following the end of a calendar year.
If you are a nonresident alien and not covered by any tax treaty, income from all sources is considered and treated essentially as earned income. (Exceptions may apply to scholarships and fellowships.) Earned income includes income earned from hospitals as a result of work-related training.
Nonresident alien IMGs are allowed only one personal exemption (regardless of marital status or existence of other dependents) and are not allowed any standard deduction. IMGs are taxed at the single tax rate, regardless of marital status. Besides the one personal exemption, IMGs may also deduct casualty losses and charitable contributions.
The chart, "Advantage, nonresident aliens," provides examples of tax differences between resident aliens and nonresident aliens. Once IMGs no longer qualify as nonresident aliens, they must file as resident aliens. Resident aliens are required to file a regular Form 1040 and are subject to all applicable employment taxes.
Charles Solcher, a member of the faculty at the University of Texas at Dallas, specializes in federal income taxation. Mary Allen is an undergraduate student at the University of Texas at Dallas.
The Internet offers these resources for IMGs trying to pay off their taxes.
An electronic version of the Tax Treaty Table from Publication 901 (http://www.bussvc.wisc.edu/ecbs/uw1139.html) lists the details of tax treaties between the United States and a number of foreign countries.
IMG Web (http://www.members.aol.com/alexfoe/) offers legal advice, immigration advice, information on residency requirements and online publications.
For forms and publications, use the Internet address http://www.irs.ustreas.gov and look for the forms and publications link. Downloadable files are in the PDF format; to view these files, you'll need Adobe Acrobat, which is available at http://www.adobe.com.
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