Resident Alien and possible tax benefits for non-US Citizen

[Strongsilence-CPA]

A student on a F1 Visa with a SS number asked me to do his taxes. (This is the first time I have dealt with these issues in almost 20 years.)

If you are bored, here is my memo. Please poke holes or point to areas for further research. Thanks in advance.

Facts
Student, 20 YO, Full-Time student, got a 1098-T

SS card lists "Valid for Work Only with DHS Authorization" 

Parents live in China

Student on F1 Visa

Owns real property (title in his name), rented for less than one month

No taxable income and his gross income is below the filing threshold for 2021

Arrived in US in 2021 and will remain in US until school ends in 2024/5

Questions and Analysis

File 1040-NR?

                Nonresident Aliens. Law: You're considered a nonresident alien for any period that you're neither a U.S. citizen nor a resident alien for tax purposes.

Resident Aliens. You're considered a resident alien for a calendar year if you meet the green card test or the substantial presence test for the year.

                Green Card Test. You're considered to have met the green card test, and are therefore a resident alien, if at any time during the calendar year you are a lawful permanent resident of the United States according to the immigration laws, and this status hasn't been revoked or administratively or judicially determined to have been abandoned.  ME: He has not applied for a Green Card. Also, he is not a permanent resident as the SS number was issued for a temporary basis.

                Substantial Presence test.  ME: Test not met due to no physical presence because all days are exempt days due to his F1 Visa.

Tax Benefit from refundable AOTC is allowed if he qualifies to file a 1040 as a Resident.

                IRS FAQ Q23. Can students with an F-1 Visa claim the AOTC?  A23. For most students present in the U.S. on an F-1 Student Visa the answer is no. Generally, the time an alien individual spends studying in the U.S. on an F-1 Student Visa doesn't count in determining whether he or she is a resident alien under the substantial presence test.

But, if he qualifies as a Resident using the first-year election then he qualifies for the AOTC refundable credit.

                First-year choice requires minimum number of days of physical presence.

                He is an exempt individual (due to his F1 visa) so there are 0 days that he can count as physical presence days.

                Therefore, he can’t qualify as a Resident Alien.

                Therefore, he can’t file a 1040 and, therefore, he can’t get the refundable tax credit.

Conclusion/Advice

Recommend not filing 1040 or 1040-NR unless there is a reason due to immigration laws.

[joshuabarksatlcs · Accepted solution]

RE: Please poke holes or point to areas for further research

Hole #1:  Rental income earned from U.S. real property by a NRA is subject to 30% tax.  30% Withholdings have to be made by the property manager or in some cases even the tenants.  

See:

https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-real-property-located-in-...

The 30% is on the gross rental without deductions.  However, there are ways to lower the tax, one of which is for the NRA to timely make a Sec 871(d) election, and that would mean the need to FILE form 1040-NR. 

(Possible) Hole #2:  If a property tax manager is involved, Form W8-BEN or W8-ECI has to be filed with the property manager periodically (for waiving the withholding, providing the tax ID number, etc.)

(Possible) Hole# 3: A few years ago, I read somewhere that  graduate students are treated differently for federal income tax purposes.  I never researched it.  Perhaps a fellow practitioner can chime in.

[Strongsilence-CPA]

joshua, thank you for these ideas.

The real property owned is a rental property.  It qualifies as a TOB.  So, in my understanding of point #1, the 30% withholding does not apply.  This cite is from your link.

In general, income from real property located in the United States that is owned by a nonresident alien is taxed at a 30% rate if it is not effectively connected with a U.S. trade or business.

#3. He isn't a graduate student yet.

#2. N/A. There is no property tax manager. This is a rental house he owns and lives in. He rents a room.

This client has deepened my belief that I need to narrow the focus of my practice. Although RA and NRA issues aren't too difficult, it is an area that could easily bring blind spots and even lead to errors.  The revenue from this niche isn't very big and I don't think I would even know how to market myself successfully. It's a good problem to have and I enjoy having to think about these different aspects of my practice. It is small but growing. But is it smart growth?

Thank you again.

[sjrcpa]

You need to make an election for the rental to be treated as effectively connected, as noted above by my fellow dog lover colleague.

[joshuabarksatlcs]

Re: The real property owned is a rental property.  It qualifies as a TOB.

Your original post was informative.  Could you share how you concluded the rental qualifies as a TOB?