1) UNDERSTANDING OPT AND TAXATION
What is OPT?
Optional Practical Training (OPT) is an opportunity for international students under an F-1 visa to work in the US for 12 months. STEM students (Science, Technology, Engineering and Mathematics) can extend this period up to 24 months. (total 36 months)
Types of OPT and taxation rule
1. Pre-completion OPT
- This type of OPT is authorised before graduation if CPT (Curricular Practical Training) is not an option. Students can work part-time, during their university semester. The work experience must be related to their studies.
- Income is subjected to federal and tax rate but FICA (Social security and Medical care) is exempted.
2. Post- Completion OPT
- This is the most common type of OPT. It is authorised for 12 months after graduation.
- Income is taxable under federal and state laws but FICA tax is exempted for up to 5 years.
3. STEM OPT Extension
- This is a 24-month extension for students in STEM (Science, Technology, Engineering and Mathematics) programs.
- Income is taxable under federal and state laws but FICA tax is exemption continues unless in the U.S for more than 5 years.
2) RESIDENCY STATUS FOR TAX PURPOSES
ARE OPT STUDENTS NONRESIDENT OR RESIDENT ALIENS?
- F-1 Visa Holders (Less than 5 Years in the U.S.)
- Non-resident Alien (NRA) for tax purposes.
- Must file Form 1040NR instead of Form 1040.
- Exempt from FICA (Social Security & Medicare taxes).
- F-1 Visa Holders (More than 5 Years in the U.S.)
- Resident Alien under Substantial Presence Test (SPT).
- Must file Form 1040 like U.S. citizens.
- Subject to FICA taxes (Social Security & Medicare).
- SUBSTANTIAL PRESENCE TEST (SPT) CALCULATION
To be considered a Resident Alien, you must meet both conditions:
- 31 days in the U.S. in the current year.
- 183 days over the past 3 years.
3) TAX RATES & WITHHOLDING FOR OPT STUDENTS
Income Type and Tax Rate
- Federal Income Tax – OPT students are subject to federal income tax, typically between 10%–37%, depending on income level.
- State Income Tax -Varies by state
- State income tax rates vary by state (ranging from 0% to ~13%). Check your state’s tax website for exact rates.
- Some cities may also impose local income taxes.
- FICA Tax (Social Security & Medicare)- 0% for NRAs on F-1 visas (First 5 years)
- Scholarships & Grants -14% (If taxable)
STATES WITH NO INCOME TAX:
You live in one of these 9 states, you don’t have to pay state income tax:
- Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming
- Tennessee & New Hampshire (Tax investment income only)
4) TAX FORMS OPT STUDENTS
NEED TO FILE
- Form 1040NR – For non-resident aliens to report income.
- Form 8843 – To claim exemption from the Substantial Presence Test.
- Form W-4 – Provided to your employer to ensure proper tax withholding.
- Form 1099-INT – If you earn interest from U.S. bank-accounts.
- Form 1098-T – If you paid tuition, you may qualify for education tax benefits.
- Form 1040 – For resident aliens (F-1 holders in the U.S. for 5+ years).
5) TAX DEDUCTIONS & EXEMPTIONS FOR OPT STUDENTS
As a Nonresident Alien (NRA), you CANNOT claim:
- Standard deduction (except for Indian students under tax treaty).
- Earned Income Tax Credit (EITC).
- Head of Household filing status.
Eligible Tax Benefits for NRAs:
- FICA Tax Exemption – No Social Security & Medicare taxes.
- Foreign Tax Credit – Claim taxes paid in another country.
- Tax Treaties – Some countries (like India, China, Canada) allow exemptions or reduced tax rates on U.S. income.
Note: Indian students on OPT can claim the Standard Deduction under the U.S.- India tax treaty ($14,600 for 2024). Mail your tax return to the IRS if filing paper forms. E-filing is not allowed for NRAs (must mail paper return).
6) TAX REFUNDS FOR OPT STUDENTS
Many students over pay taxes due to incorrect W-4 withholding. You can get a refund if you:
- Paid too much federal/state tax.
- Overpaid FICA taxes (by mistake).
- Qualify for tax treaty benefits.
7) COMMON MISTAKES TO AVOID
- Not Filing a Tax Return – Even if no income, form 8843 must be submitted.
- Filing as a Resident (1040) when you’re a Non-resident (1040NR).
- Paying FICA Taxes by Mistake – Ask employer for a refund if deducted incorrectly.
- Not Claiming Tax Treaty Benefits – Check if your country has an agreement with the U.S.
For expert guidance on cross-border taxation, visit www.rtulsian.com or reach out to us on ishan@rtulsian.com or WhatsApp us on +91 6289107303 for a personalized consultation and seamless tax compliance solutions.