NEWS / Non-resident alien students incorrectly classified as US tax residents, receive unauthorized $1,400 stimulus payment

A number of F-1 visa students have received an unexpected $1,400 stimulus payment from the Internal Revenue Service despite being ineligible for it. These students are now required to return the payment to the IRS. The issues appear to have arisen due the IRS’s incorrect classification of the students as US tax residents.

“If you were a non-resident alien for tax purposes in 2021 and received this payment, you are required to return it to the IRS,” CPA Samuel Handwerger was quoted by the University of Maryland as stating. Handwerger works for TerpTax a tax preparation company that provides free preparation service to low-to-middle income students.

The $1,400 stimulus payment was mandated to any US tax resident earning up to $75,000 per year by the 2021 American Rescue Plan Act, passed in the early days of the administration of former president Joe Biden to alleviate economic issues caused by the COVID-19 pandemic.

Individuals typically qualify to be US tax residents by being US citizens, US permanent residents, or under the substantial presence test (being present a total of 183 days in the past 3 years, with only a third of days counted in the preceding year and a sixth of days counted in the year before). An exception to the substantial presence test is made for students on an F-1 visa under which students remain non-resident aliens for the first 5 years they are in the United States independent of the actual number of days spent in the country.

Being a non-resident alien for taxation purposes means that individuals are only taxed on income derived from United States sources. Any income earned from foreign sources is exempt from US income tax. However, this also means that students would be ineligible for the benefits and tax credits normally granted to US tax residents. One of such benefits was the $1,400 stimulus payment.

The issue appears to have arisen for students who erroneously filed IRS Form 1040, US Individual Income Tax Return despite being non-resident aliens. Form 1040 should only be used by US tax residents, while non-resident aliens should file IRS Form 1040-NR, US Nonresident Alien Income Tax Return.

Since IRS computers automatically distributed the $1,400 to any individual who had filed Form 1040 for 2021 and reported up to $75,000 of total income, the students ended up receiving the stimulus payment they were ineligible for. Some students filed an amended return to indicate that they were in fact non-resident aliens, but IRS computers did not take this into account.

Individuals who had been non-resident aliens in 2021 but who received the $1,400 stimulus payment are advised to return the payment to the IRS to prevent the accrual of interest.