In December 2017, the U.S. Congress passed a comprehensive piece of tax legislation known as the Tax Cuts and Jobs Act (TCJA). This reform introduced widespread changes to individual and corporate taxation, including major revisions that affect international students and nonresident aliens living temporarily in the United States. While the legislation was designed with U.S. taxpayers in mind, many of its consequences directly impact individuals on F, J, M, and Q visas.
Most of the changes implemented by the TCJA came into effect on January 1, 2018. As a result, nonresident students have been subject to a new set of tax rules starting with the 2018 tax year. These changes have implications for how income is calculated, what deductions are allowed, how withholding is managed, and whether scholarships and waivers are taxed. Although the reform aimed to simplify and streamline the tax code, it has made the process of filing as a nonresident more complex for many.
This article explores the impact of the TCJA on nonresident students, focusing on changes to exemptions, deductions, tax treatment of scholarships, and more. It serves as a practical guide to help international students navigate their U.S. tax responsibilities under the current law.
Removal of Personal Exemption for All Taxpayers
One of the most significant provisions of the TCJA was the elimination of the personal exemption for all individuals, including nonresident aliens. Before the law changed, each taxpayer was entitled to a personal exemption that reduced their taxable income. In 2017, this exemption was worth $4,050 and could be claimed by nonresidents, provided they met certain criteria.
The TCJA reduced the personal exemption amount to zero beginning in 2018. This change applies to both resident and nonresident taxpayers and represents a permanent adjustment to the tax code. For nonresident students, this change means that they can no longer use the personal exemption to reduce their taxable income, resulting in a higher tax burden compared to previous years.
This adjustment is especially impactful for students who earn a modest income through on-campus jobs, research assistantships, or internships under curricular or optional practical training. The removal of the exemption eliminates one of the few tax benefits previously available to this group.
Expansion of Standard Deduction and Its Limited Application
Alongside the elimination of personal exemptions, the TCJA nearly doubled the standard deduction for individual taxpayers. For single filers, the standard deduction increased from $6,350 in 2017 to $12,000 in 2018. This change was promoted as a simplification tool that would reduce the need for itemized deductions.
However, this provision does not apply universally. Nonresident aliens are not permitted to claim the standard deduction unless their home country has a specific tax treaty with the United States that allows it. For most international students, the expanded standard deduction is not available and does not reduce their taxable income.
There is a notable exception for students and trainees from India. The U.S.-India tax treaty allows Indian nationals on F-1 or J-1 visas to claim the standard deduction in the same manner as U.S. citizens and residents. This provision continues to apply even after the TCJA, which means eligible Indian students can benefit from the increased standard deduction and may see a lower overall tax liability as a result.
For nonresidents from countries without such treaty provisions, the lack of access to the standard deduction, combined with the elimination of the personal exemption, means that nearly all income becomes fully taxable unless other deductions apply.
Tuition Waivers Under Section 529(c) Now Considered Taxable
Many graduate students in the U.S. receive tuition waivers as part of their academic compensation package. These waivers often cover the full or partial cost of tuition in exchange for the student providing teaching or research services. Prior to the TCJA, tuition benefits provided under Section 529(c) were treated similarly to scholarships under Section 117 and were generally excluded from taxable income.
With the implementation of the TCJA, the tax treatment of Section 529(c) benefits has changed significantly. Beginning with the 2018 tax year, tuition waivers issued under this section are now fully taxable for all students, including nonresident aliens. This means that graduate students who previously did not need to report these waivers as income must now include their value when calculating total taxable income.
Scholarships that meet the conditions outlined in Section 117 remain non-taxable as long as they are used for qualified educational expenses such as tuition, required fees, books, and supplies. However, any portion of a scholarship or grant that covers living expenses, meals, or transportation is still considered taxable. Tuition waivers, now clearly taxable under Section 529(c), further complicate the financial picture for students.
International students receiving tuition reductions must now review their financial aid awards carefully and ensure they report any taxable portion correctly. Universities may issue tax documents such as Form 1042-S to reflect this taxable income, and students may be subject to federal withholding if the waiver exceeds treaty exemption amounts.
Capped Deduction for State and Local Taxes (SALT)
The TCJA imposed a cap on the amount of state and local taxes that can be deducted on federal income tax returns. From 2018 through 2025, the maximum deduction allowed for state and local income, sales, and property taxes is limited to $10,000. For married individuals filing separately, the cap is $5,000.
Although the deduction for state and local taxes remains available to nonresident aliens who itemize using Form 1040NR or 1040NR-EZ, the cap limits the total amount that can be deducted. For most international students with limited income, state and local tax deductions may not exceed the cap. However, students who work in high-tax jurisdictions or receive large taxable stipends may no longer be able to deduct the full amount they pay to state and local governments.
Previously, some students could use the full amount of state and local taxes paid to reduce their federal tax burden. Now, with a strict cap in place, the deduction is only partially available. This change reduces the benefit of itemizing for many nonresident filers and makes standard deduction provisions more attractive though most cannot claim them.
Ineligibility of Prior-Year State Tax Payments as Deductions
Under the prior tax law, it was possible to deduct state and local taxes paid in the current tax year for previous tax years. For example, if a student resolved a prior year’s tax debt during the current year, they could include that payment as part of their state and local tax deduction on their federal return.
The TCJA discontinues this practice for tax years beginning in 2018. Payments made in the current year for prior-year tax liabilities are no longer deductible on federal tax returns. Only taxes attributable to the current tax year may be deducted.
This change is relevant for international students who return to their home country after finishing their studies but continue to pay outstanding U.S. state tax obligations. Those payments will not be considered deductible when filing a federal return, even if they are substantial.
Overall Reduction in Deductible Expenses
The removal of the personal exemption, restrictions on the standard deduction, and the cap on state and local tax deductions collectively reduce the number of deductions that a nonresident student can claim. For many, this means filing a return with limited or no reductions to taxable income, even when working part-time or receiving educational support.
Students should review whether itemizing deductions still makes sense or if claiming treaty benefits is a more effective strategy. Those from treaty countries may still have options to exempt portions of their income under relevant treaty articles.
Rising Importance of Accurate Income Reporting
With the narrowing scope of deductions and exemptions, accurate income reporting has become more important than ever. International students must ensure that they correctly identify and report all sources of taxable income, including wages, stipends, scholarships, and tuition waivers. Incorrect reporting can result in penalties or underpayment notices from the IRS.
The IRS may issue updated guidance or clarify how certain educational benefits should be treated for tax purposes. Until then, students should rely on official IRS publications, their school’s international office, or a qualified tax professional with experience in nonresident tax compliance.
Key Early Impacts of the TCJA
While the TCJA was designed to benefit American taxpayers and simplify filing for the majority of the population, it introduced new complexities for nonresident students. The loss of the personal exemption and restrictions on the standard deduction dramatically changed how income is calculated. Additionally, changes to the tax treatment of tuition waivers and limits on state tax deductions have narrowed the options available for reducing taxable income.
Students who previously paid little to no federal tax due to exemptions and waivers now face the prospect of reporting more income and receiving lower refunds or even owing tax. These early changes signal a need for increased awareness, proactive planning, and careful compliance in the years following the reform.
Understanding the New Withholding Rules for Nonresidents
The TCJA impacted not just tax return filings but also how taxes are withheld throughout the year. Starting in 2018, employers were required to adjust how they calculate income tax withholding from employee paychecks. This affected many nonresidents working part-time on campus or through authorized work programs such as Curricular Practical Training (CPT) and Optional Practical Training (OPT).
No Personal Exemptions in Withholding Calculations
Before 2018, Form W-4 allowed individuals to claim personal exemptions, which reduced the amount of income subject to withholding. The TCJA set the value of personal exemptions to zero, thereby eliminating this benefit. As a result, nonresident students, who already had limited options for deductions, experienced a greater portion of their income subjected to withholding.
W-4 Form Adjustments for Nonresidents
Although the IRS did not immediately update Form W-4 in 2018, it issued guidance (Notice 1036) instructing employers to base withholding solely on standard deduction allowances. Since most nonresident aliens are not eligible for the standard deduction, except for students from India under the U.S.-India tax treaty, this meant that nearly all wages earned by nonresidents were subject to full withholding without adjustments.
Employers were instructed to treat all nonresident employees as single with one allowance and to add an additional amount to each paycheck’s withholding. This guidance continues to impact how much take-home pay nonresident students receive and how much they may overpay throughout the year.
Additional Withholding Considerations for Treaty Benefits
Nonresident students from countries with tax treaties that offer exemptions on wage income may still be eligible for reduced or zero withholding on qualifying income. However, they must submit Form 8233 annually and meet eligibility requirements. Even with a valid treaty claim, employers often err on the side of withholding to avoid compliance risks, meaning students must claim refunds later through Form 1040NR.
Revised Tax Brackets and Their Effect on Nonresident Students
The TCJA not only changed the amount of income subject to taxation but also restructured how that income is taxed. Starting in 2018, new tax brackets came into effect, altering the progressive rate system for all taxpayers, including nonresident aliens.
New Tax Bracket Structure for Single Filers
Under the revised brackets, the tax rates for single filers are as follows:
- 10% on income up to $9,525
- 12% on income between $9,526 and $38,700
- 22% on income between $38,701 and $82,500
- 24% on income between $82,501 and $157,500
- 32% on income between $157,501 and $200,000
These brackets apply equally to nonresident aliens. For most international students earning part-time income, their taxable income typically falls within the 10% or 12% range. However, students with higher-paying internships or those working full time under OPT may enter the 22% bracket or beyond, depending on their annual earnings.
No Differentiated Rates for Nonresidents
Unlike residents, nonresident aliens cannot file jointly with spouses (except in limited cases) or claim head-of-household status. They are taxed using the single filer rate schedule, regardless of their actual marital or household status. This often leads to higher tax liabilities for nonresident students when compared to resident counterparts with similar income.
Flat Withholding on Certain Income Types
In addition to progressive taxation, nonresidents receiving passive income—such as interest, dividends, royalties, or scholarships not tied to services—may be subject to flat withholding rates of 30%, unless reduced by a tax treaty. These amounts are withheld at source and often cannot be adjusted unless the income is treated as effectively connected with a U.S. trade or business.
Changes to the Definition of Effectively Connected Income (ECI)
The TCJA introduced a significant revision to how income is classified as effectively connected with a U.S. trade or business. This classification is crucial for nonresidents because it determines whether income can be taxed on a graduated basis rather than a flat 30%.
Service-Based Income Reclassification
Under previous rules, income from services performed in the U.S. by nonresidents—such as wages earned through student employment or CPT/OPT—was generally treated as effectively connected income (ECI). This allowed students to pay tax under the progressive bracket system and benefit from certain deductions, if eligible.
However, the TCJA narrowed this definition. Income from services performed by a nonresident may no longer automatically qualify as ECI unless directly connected with a U.S. trade or business in a defined capacity. This change can create confusion for students employed by universities, research centers, or private companies, especially if the income arises from training programs not deemed part of a U.S. trade or business.
Impact on Scholarship and Fellowship Income
The revised rules also influence how scholarships and fellowships are taxed. Generally, tuition and related expenses are not taxable under Section 117, but amounts used for living expenses or services rendered are considered taxable income. With the narrowed ECI rules, such income may now be subject to flat-rate taxation unless students can demonstrate a direct connection to a trade or business in the U.S.
This change increases the complexity of reporting taxable scholarships and may require students to review treaty benefits more carefully or consult a tax professional familiar with nonresident taxation.
Procedure 88-24 and Its Limited Future Use
Before the TCJA, many nonresident students benefited from IRS Revenue Procedure 88-24, which permitted scholarship recipients to treat their grants as effectively connected income and deduct expenses such as tuition, fees, and personal exemptions.
Impact of TCJA on This Revenue Procedure
With the elimination of personal exemptions and the significant reduction in allowable deductions for nonresidents, the practicality of Revenue Procedure 88-24 has largely diminished. While technically still in place, its usefulness is now restricted to students from India who can claim a standard deduction under the U.S.-India tax treaty.
For all other nonresident students, the benefits of this procedure are limited or nonexistent under current law. The TCJA’s changes to the definition of ECI and the removal of common deductions mean that students receiving taxable scholarships may be subject to flat withholding and ineligible to reduce their taxable income through this method.
Treaty Benefits as the Primary Alternative
In the post-TCJA landscape, treaty provisions have become the most reliable path for reducing taxable scholarship or fellowship income. Students from treaty countries should review the language of their country’s agreement with the U.S. to determine whether specific clauses exempt scholarship income or permit deductions. These benefits are not automatic and require proper documentation, often through Forms 8233 or W-8BEN.
Increased Complexity in Filing Form 1040NR
The TCJA’s broader changes have made it more difficult for nonresident students to navigate U.S. tax filings, especially when they are receiving a combination of wages, scholarships, and investment income.
More Line Items and Fewer Deductions
Form 1040NR, the primary tax form for nonresidents, has seen increased complexity in the post-TCJA years. Students must report all taxable income, even if no tax was withheld, and identify the nature of each income source. While deductions for state taxes remain, other deductions—such as moving expenses or professional costs—are no longer allowed.
This means students are often reporting higher taxable income without any corresponding offsets, increasing their total tax liability.
State Return Complications
Even though the TCJA is a federal law, it indirectly affects how students file their state tax returns. States may or may not conform to the federal definition of taxable income. For example, some states allow moving expense deductions or personal exemptions, even though they’ve been eliminated at the federal level. This creates mismatches between federal and state returns that students must resolve.
Importance of Proper Classification and Forms
Students who incorrectly file as residents using Form 1040 instead of the nonresident Form 1040NR risk losing eligibility for treaty benefits and may be penalized by the IRS. The TCJA has not changed residency rules, but the financial penalties for misclassification have grown due to the expanded scope of income subject to tax and the reduced availability of deductions.
Increased Importance of Treaty Literacy for Nonresident Students
As nonresident students face more tax obligations with fewer built-in reliefs, understanding the tax treaty between their home country and the U.S. becomes more essential than ever.
Common Treaty Benefits for Students
Many tax treaties include provisions that exempt income for students under specific conditions. These benefits can include:
- Exempting wages up to a certain amount earned while studying
- Allowing standard deductions or personal exemptions
- Exempting scholarships or grants for study and training
To claim these benefits, students must attach a statement to their Form 1040NR, cite the applicable treaty article, and in some cases submit Form 8833 (Treaty-Based Return Position Disclosure) to explain their claim in detail.
Long-Term Impacts of the TCJA on Nonresident Students and Their U.S. Tax Obligations
The Tax Cuts and Jobs Act (TCJA) has significantly reshaped the U.S. tax landscape, and its long-term implications continue to influence how nonresident students meet their tax obligations. While some provisions of the TCJA are temporary and set to expire in the coming years, others are permanent and continue to affect income reporting, deductions, and how employers withhold taxes from nonresident paychecks.
Examines the ongoing and future implications of the TCJA for international students in F-1, J-1, M-1, and Q visa statuses. It addresses how these tax changes interact with treaties, employment income classifications, and what nonresident students can expect in coming tax years.
Evaluating the Changes to Effectively Connected Income
Effectively Connected Income (ECI) plays a central role in determining how nonresidents are taxed in the U.S. Before the TCJA, certain types of U.S.-sourced income, including wages from authorized employment, were automatically classified as effectively connected with a U.S. trade or business. This classification allowed nonresidents to pay tax on that income at graduated rates rather than a flat withholding rate.
The TCJA redefined how the U.S. tax code views effectively connected income for nonresidents. It made a distinction between fixed, determinable, annual, or periodic (FDAP) income and income that can be directly associated with a U.S. business activity. As a result, some income types that were once treated as connected may now fall outside this scope.
For nonresident students working under Curricular Practical Training (CPT) or Optional Practical Training (OPT), this change has serious implications. In certain situations, wage income might be categorized differently, affecting the tax rate and whether deductions can be claimed. While guidance from the IRS has been limited, students should stay informed about how this shift might affect their eligibility for tax treaty benefits or their ability to use graduated tax rates.
The End of Miscellaneous Deductions and Educational Expense Claims
The TCJA suspended miscellaneous itemized deductions, removing the ability to deduct certain unreimbursed expenses. This suspension affects several categories of expenses that international students might have claimed in previous tax years.
Under pre-TCJA rules, students and scholars could sometimes deduct expenses related to research, classroom supplies, or even professional dues if they itemized deductions on their nonresident return. These deductions are now disallowed until at least the 2025 tax year.
Similarly, education-related credits such as the American Opportunity Credit or Lifetime Learning Credit remain unavailable to nonresident aliens, and the loss of miscellaneous deductions further limits potential tax benefits for international students. This places more emphasis on proper tax planning and evaluating treaty benefits during the tax filing process.
Understanding the Standard Deduction Exception for Indian Students
While the TCJA eliminated personal exemptions and limited who can claim the standard deduction, a key exception remains for Indian students under Article 21(2) of the U.S.-India tax treaty. This provision allows Indian nationals who are students or business apprentices to claim the standard deduction on Form 1040-NR.
As of 2018 and beyond, the standard deduction is $12,000 (increased to $13,850 in later years due to inflation adjustments). This benefit allows Indian students to reduce their taxable income significantly even when the personal exemption no longer applies.
No other country’s treaty currently provides a similar provision, which means most nonresident students from other countries cannot take advantage of the standard deduction. This unique clause in the U.S.-India treaty remains one of the few ways nonresident students can reduce taxable income following the TCJA.
Tuition Waivers and Taxable Scholarship Income
Section 529(c) tuition waivers became a point of concern following the TCJA, as the law now treats them differently than in the past. While scholarships under Section 117 continue to be non-taxable when used for qualified educational expenses like tuition, fees, and books, waivers under Section 529(c) are now considered taxable income.
This change affects students who receive tuition reductions or waivers from their universities that are not directly tied to academic performance or research duties. These waivers must now be reported as income, even if the student never physically receives the funds.
The difference between Section 117 and Section 529(c) is important. Nonresident students receiving assistantships, fellowships, or stipends should understand how their scholarships are classified by their institution. In some cases, the classification could determine whether the amount is subject to federal income tax and whether Form 1042-S or Form W-2 is issued.
Moving Expense Deduction Suspension
Another change that continues to affect relocating international scholars and students is the suspension of the moving expense deduction. Before 2018, students and educators who met time and distance tests could deduct moving costs related to a new job or academic placement.
Under the TCJA, this deduction is now reserved only for active-duty military members moving due to orders. For all others, including international students moving for CPT or H-1B employment, moving expenses are no longer deductible through 2025.
This includes the cost of transporting personal belongings, airfare, lodging during the move, and storage. Although this change may not significantly impact low-income students, those transitioning to employment or relocating across the U.S. for research or academic roles will feel the financial burden more acutely.
Changes to Employer Withholding and Form W-4 Impacts
The TCJA introduced adjustments to the withholding tables used by employers, which affected how taxes are calculated on nonresident pay. While the Form W-4 itself remained structurally unchanged in 2018, the IRS guidance required employers to implement new withholding calculations.
The updated method assumes taxpayers are eligible for the standard deduction, which nonresident aliens typically are not—except Indian students, as noted earlier. This means employers may withhold more from a nonresident’s paycheck than is necessary, especially if the student is eligible for tax treaty benefits or other reductions.
Nonresidents are still required to follow special instructions when completing Form W-4, such as entering “Nonresident Alien” on line 6 of older versions of the form and avoiding claims for standard deductions unless permitted by treaty. These nuances require careful attention during onboarding and job acceptance.
Implications of Adjusted Tax Brackets
The new tax brackets introduced under the TCJA continue to affect how nonresident students are taxed on their U.S.-sourced income. While nonresidents do not file jointly or as heads of household, the single filing status brackets apply to their 1040-NR returns.
The brackets have shifted in favor of slightly lower rates at certain income levels. For instance, the 10 percent bracket still applies to the first portion of income, but subsequent brackets moved from 15 to 12 percent, and from 25 to 22 percent.
For many students with part-time jobs, stipends, or internships, this means their effective tax rate is somewhat lower than under the pre-2018 regime. However, the loss of deductions like the personal exemption often outweighs the benefit of lower rates, particularly for students earning between $10,000 and $40,000 annually.
Cap on State and Local Tax Deductions
The TCJA placed a cap on the amount of state and local taxes that taxpayers can deduct from their federal taxable income. While many international students may not itemize deductions, those who do can now only deduct up to $10,000 ($5,000 for married filing separately).
For students in high-tax states like California, New York, or New Jersey, this cap could limit their ability to deduct the full amount of state income tax withheld from their pay. This may result in higher overall federal tax liability, especially for students who receive larger research stipends or full-time salaries under practical training programs.
Ineligibility for Education Tax Credits
The TCJA preserved the education tax credits for U.S. citizens and residents, but these benefits remain off-limits to nonresident aliens. The American Opportunity Credit and Lifetime Learning Credit continue to be restricted based on filing status and residency status.
This exclusion highlights the limited number of federal tax benefits that international students can claim, especially in light of the TCJA’s broader limitations. Combined with the elimination of personal exemptions and miscellaneous deductions, this exclusion further narrows the tax advantages available to nonresidents.
Procedure 88-24: Diminished Relevance
Previously, IRS Procedure 88-24 allowed certain scholarship and fellowship income to be treated as wages, thereby qualifying the recipient to claim exemptions and deductions. This strategy was useful for students trying to reduce their overall tax liability by reporting grants or assistantships as earned income.
However, with the TCJA eliminating the personal exemption and limiting deductions, this procedure has lost much of its effectiveness. The shift in how the IRS defines trade or business income further complicates the use of this method. As such, Procedure 88-24 now has limited applicability outside of specific treaty situations, such as the U.S.-India agreement.
Future Expiration of Temporary Provisions
Many TCJA provisions, including the removal of miscellaneous deductions, the moving expense suspension, and the SALT cap, are set to expire after the 2025 tax year unless extended by Congress. If these provisions are not renewed, international students may regain access to certain deductions and see changes in how their income is taxed starting in 2026.
Nonresident students should be aware of these sunset clauses and monitor updates from the IRS and their school’s international office. Tax filing procedures could shift again depending on legislative changes or new treaty interpretations.
IRS Filing Challenges and Treaty Use
With fewer deductions available, increased complexity in how income is classified, and growing reliance on treaty benefits, nonresident students must take extra care when preparing tax returns. Errors in understanding treaty eligibility, misclassifying scholarship income, or claiming deductions they are not entitled to can result in penalties or audits.
Proper classification of income on Form 1042-S, understanding the limitations of Form W-2 for nonresidents, and applying treaty articles correctly are now more critical than ever. The TCJA has made self-preparation of taxes more difficult for many international students, underscoring the need for access to reliable filing guidance.
Conclusion
The Tax Cuts and Jobs Act introduced sweeping changes to the U.S. tax code that have significantly reshaped how nonresident students, scholars, and trainees navigate their tax obligations. From the elimination of personal exemptions to the restriction or removal of valuable deductions such as moving expenses and miscellaneous itemized costs, the impact on international students has been both wide-ranging and long-lasting.
For many, the loss of traditional tax benefits has led to higher taxable income and increased withholding on wages and stipends. While certain treaty provisions, such as those under the U.S.-India tax agreement, still offer partial relief in the form of standard deductions, most nonresident students now find themselves subject to stricter rules and fewer opportunities to lower their taxable income.
The redefinition of effectively connected income, along with revised employer withholding methods and updated tax brackets, further complicates tax compliance for nonresidents working or studying in the U.S. Additionally, long-standing procedures such as Revenue Procedure 88-24 are becoming less applicable, especially in light of changes to what qualifies as a U.S. trade or business.
As these provisions are either permanent or remain in effect through 2025, understanding their implications is essential for nonresident students filing Form 1040NR and planning for their financial responsibilities. Staying informed about treaty benefits, IRS updates, and employer compliance rules can help mitigate tax burdens and avoid costly errors.
In this new tax landscape, international students must approach each filing season with greater attention to detail, an awareness of treaty rights, and a clear understanding of which tax breaks still apply to them. Whether studying under an F-1 or J-1 visa, the impact of the Tax Cuts and Jobs Act is undeniable and requires careful navigation.