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Sunday, February 25, 2007 |
More Tax Returns for International Students!!! |
Yannick and I have been students for so long that we were "forced" to become "sophisticated" senior students, at least financial-wise.
We came from China. There is an annual $5,000 exclusion of a student’s wages for the first 5 years. We were very happy back then, because we were optimistic that we could finish our PhD's in 5 years.
As you know now that we did not accomplish our mission within 5 years. In the 6th year, as we were grudging the loss of the "$5000 exclusion of students wages", we started extensive research on tax laws, treaties, and even attended a PhD level taxation seminar! (You see, there is a reason that we stayed in graduate schools for such a long time).
And you know what? Our efforts did get rewarded! Here is what we found: The tax treaty from the People's Republic of China (PRC) contains no time limit, and a Chinese student who qualifies for it may use the article for as long as he is still in valid F-1 status, including during that period in which he is engaged in practical training in valid F-1 status.
So, if you are from P.R.C, still a student after 5 years in U.S., and believe in "NO Taxation Without Representation", here is something we want to share with you. Hopefully this will save you some time, and help you get out of graduate school early.
Step by Step instruction to get you $5,000 tax exclusion:
I. Download Form 8833 .
II. Fill out the form like this:
1. Enter the specific Treaty position relied on: (a) Treaty country: People’s Republic of China (b) Articles: 20(C), Paragraph 2 of 04-30-1984 prot.
2. List the internal revenue code provisions overruled or modified by the treaty asked return position: IRC61; 871(b)
3. Name, identifying number of …. : N/A
4. List the provision(s) of the limitation on benefits…: N/A
5. Explain the treaty-based return position taken:
The taxpayer is a citizen of the People's Republic of China. He entered the United States on on an F-1 visa (student), and has remained in F-1 status continuously since. Under the residency rules of IRC7701 (b), the taxpayer passed the substantial presence test in and his residency starting date was 01-01-. This means that for 2006, the taxpayer is a resident alien and is filing form 1040 for 2006 as a resident alien.
Article 20(c) of the USA-China income tax treaty allows an annual $5000 exclusion of student wages from gross income. The article contains no time limit, and a Chinese student who qualifies for it may use the article for as long as he is a bona fide student in valid F-1 status. Paragraph 2 of the 04-30-1984 protocol of the USA-China income tax treaty contains the "saving clause" of the treaty, which normally acts to nullify the tax treaty's benefits once a resident of China has become a resident of the USA. However, paragraph 2 of the Protocol also specifies exceptions to the saving clause, among which is article 20 on student and trainees. This means that, even though the taxpayer has become a resident alien under the substantial present test of IRC 7701(b), he may still claim the benefit of article 20 of the USA-China income tax treaty. The taxpayer has elected to do this, and is claiming an exclusion from gross income for 2006 of $5,000 in student wages as allowed by article 20(c) of the USA-China income tax treaty. TOTAL EXCLUSION CLAIMED: $5,000
Gong Xi Fa Cai!Labels: International Tax Treaty, Tax |
posted by Jacqui @ 6:17 AM | |
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88 Comments: |
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Hi, I would never guess with those French names you are using you are from China!
Snork Maiden is also from the PRC. She has been using the tax treaty up till now and her W-2 reports her salary as $5000 less than it really is which I guess is due to her signing the treaty form. When I computed her 1040-EZ last night she ends up with a big refund because of the combined $8450 deduction/exemption. But then I thought: "How can you claim a tax treaty as a resident of China and simultaneously file as a resident for US tax purposes?" It seems you answer this here. Technically, I guess she would need to submit all that stuff. In practice I strongly doubt the issue will raised. Maybe for 2008 when she will probably still be OPT (unless we move to Europe or something) she could fill out all that stuff.
She already has signed an 8833 that the school gave her for the 2007 tax year.
I was only an F1 for 4 years so never ran into this issue back then. When I was a J1 visiting professor I claimed the United Kingdom tax treaty and got all my US taxes refunded for the 1 1/2 years I was under that status.
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Thanks for all the info. I am sure something similar would work out for me.
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Hi Yannick
I'm trying to complete Snork Maiden's taxes now. My only question is I have a 1042S with the $5000 reported on it. If we were still filing a 1040NR-EZ there is a box line 6 to mention that excluded amount. But on neither the 1040 not 1040-EZ is there a box for that of course. So what do I do? Just ignore the $5000?
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moom:
yes, if Snork Maiden has a 1042S, then her W2 should only show a her Total_Actual_Wage - $5000. In this case, you will still attach Form 8833, but on the line 7 of 1040, just use the number on W2, effectively ignore the $5000 (of course, IRS can find it using the attached 1042S and 8833). If she did not have the 1042S and the W2 showed the Total_Actual_Wage, then she should still attach Form 8833 and on line 21 (other income...), put "See attached Form 8833" and "(5000)" as -$5000 to arrive at the correct amount on line 22. As you told me, she would not qualify for Resident Alient until 2008, thus, you only need 1040NR-EZ for her this year? You must have also reminded her of Roth IRA contribution, right?
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# cs Says: March 7th, 2007 at 4:58 pm e
"Thanks for information.
Now that you’re resident alien (for tax purpose) in the 6th year, do you pay any FICA on your student wages?"
Sorry for replying you late. Somehow I just read your comment. I am still not sure why your comment was put into the moderation queue, since you put down an email already.
I didn’t pay any FICA as a student. Full-time students enrolled in a university and working part-time for the same university are exempted from FICA payroll taxes.
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I have been asked by a few friends for the content of US China tax treaty. The treaty is called UNITED STATES-THE PEOPLE'S REPUBLIC OF CHINA INCOME TAX CONVENTION.
Here is Article 20: ARTICLE 20 (Students and Trainees) A student, business apprentice or trainee who is, or was immediately before visiting a Contracting State, a resident of the other Contracting State and who is present in the first- mentioned Contracting State solely for the purpose of his education, training or obtaining special technical experience shall be exempt from tax in that Contracting State with respect to: (a) payments received from abroad for the purpose of his maintenance, education, study, research or training; (b) grants or awards from a government, scientific, educational or other tax-exempt organization; and (c) income from personal services performed in that Contracting State in an amount not in excess of 5,000 United States dollars or its equivalent in Chinese yuan for any taxable year. The benefits provided under this Article shall extend only for such period of time as is reasonably necessary to complete the education or training.
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Montga Says: April 7th, 2007 at 3:18 am e Thanks for the information! I have a question related to my situation: 2006 was my sixth year in F-1 status (so I need to file 1040 this year), my opt starts from Feb 2006 and I graduated in Mar 2006. Starting from Aug 2006, I accepted a job offer but worked in the status of OPT until Nov. 2006 when my H-1b was approved. My question is: can I still claim the $5000 treaty, given that I’m not holding F-1 status for the whole year of 2006? Thank you very much for answering my question! Dear Montga: Welcome to our blog. The quick answer is yes, since you were still on F1 during your OPT. What kind of job you are doing since last August? The worst case is that your current job is not essential (or related) to your training, thus, you were only able to claim exemption on whatever graduate stipends you earned during the first 3 months last year. Hopefully, that’s already $5000 to claim. If your job is in the field of your training like most people and involves research in industry or academia, then you could use your income earned while you were on OPT since that’s part of your training. Good luck!
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Came across a similar question as Montga's accidentally.
mm Says: April 26th, 2007 at 3:45 pm edit Can you help me with this? I just graduated and came to a University as a postdoc. I’m under F-1 OPT right now. Can I still get tax treaty before my H1B is issued? My university payroll said I can’t because I am a full-time employee and no longer student. They said the tax treaty applies to RA/TA type of job, but not my current job. Thanks.
mm: Welcome to our blog. I think you can. As I understand, you need two conditions to claim the treaty benefit: 1. Holding a trainee visa, such as F1 or J1. Even you are in OPT, it's still an F1 visa. So you're fine. 2. Have income through your training on which to claim the exemption. Even postdoc is a full time employment, it's still part of your training. We all know that postdocs earn as little as 1/2 or 1/3 of prevalent salary of comparable position in industry. So that's not a problem.
This might be tricky because some universities classify postdocs as "staff", not as "trainee" such as in my school. In this case, your school may refuse to set up form 8233 for you.
Remember, you can always do it yourself later using form 8833 to get the money back from IRS, without going through the university. So if your school refuses to do it for you, just let it be. File a form 8833 next year to get the money back.
One more point, the tax treaty is calendar-year based. If you have several months' student stipends to claim the treaty on earlier this year, you can do it without such complication (next year's tax return). I hope this helps. Good luck!
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Hi Yannick, Your answer is truly helpful~~Thanks. I have two more questions: 1) I have read somewhere that we qualify for $5000 treaty exemption even after our status change from F1 to H1 as long as we don't become U.S. permanent resident. I am not positive about this. Hope you can confirm. 2) in the 6th year of F1, if we file as resident alien, are we subject to FICA tax with the treaty in effect? Li
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Hi Yannick, Your answer is truly helpful~~Thanks. I have two more questions: 1) I have read somewhere that we qualify for $5000 treaty exemption even after our status change from F1 to H1 as long as we don't become U.S. permanent resident. I am not positive about this. Hope you can confirm. 2) in the 6th year of F1, if we file as resident alien, are we subject to FICA tax with the treaty in effect? Li
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Hi
My friend is from PRC. She spent 2 years in Montana as a graduate student (F1). Last year she moved to Oregon and started her PhD study there. She had income from both states.
As a PRC resident, she can claim the $5000 tax treaty benefit. I know both Montana and Oregon honor this federal tax treaty. The question is, how to claim this $5000 for her two state tax forms. Is it OK to split this amount and claim $2500 for each state?
thank you very much
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The information is really helpful. I do have a question though, I didn't claim this treaty for the last 3 years, do you think I can ask over-paid tax back from IRS? Thanks!
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Hi Yannik,
Thanks for your blog and all the information you guys provided! I am facing the same situation. My case is: nonresident, F1 Visa issued by PRC. Since I do not have 1042S, I need to claim to deduct this amount of money from taxable income in form 1040NR. After I specify the -$5000 income in line 21, do I still need to fill $5000 in line 22 and Item M, in order to arrive the correct amount in line 23? Or I just leave line22 and item M to be blank? Thanks again!
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This is very helpful. Thanks.
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-Anonymous on Aril 2nd: Most states refer to 1040 for your AGI, and start tax calculations there. Also states prorated exemptions for part-year residents as well. So I guess you can either claim $5000 against your first $5000 income like most students do, or prorated between two states. Hope this helps.
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- Anonymous on April 6th: You can file Form 1040X to get your money back. Good luck!
- Ishtar: My pleasure. 1040NR is different from the 1040 I mention above, so I'm no longer familiar with it. I think you can use either line 21 or 22, but not both. You'd better double check with another source. Good luck!
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Thank you Yannick!
Just two small questions:
I. For nonresident alien:
N/A for "2. List the internal revenue code provisions overruled or modifiedby the treaty-based returen position"?
II. Which boxs should I check: - The taxpayer is disclosing a treaty-based return position as required by section 6114; - The taxpayer is a dual-resident taxpayer and is disclosing a treaty-based returen position as required by....
The first, or none of them?
-ishtar
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ishtar:
I hope you've found the answer. If not, here is my interpretation:
section 6114: Treaty-based return positions
(a) In general Each taxpayer who, with respect to any tax imposed by this title, takes the position that a treaty of the United States overrules (or otherwise modifies) an internal revenue law of the United States shall disclose (in such manner as the Secretary may prescribe) such position - (1) on the return of tax for such tax (or any statement attached to such return), or (2) if no return of tax is required to be filed, in such form as the Secretary may prescribe. (b) Waiver authority The Secretary may waive the requirements of subsection (a) with respect to classes of cases for which the Secretary determines that the waiver will not impede the assessment and collection of tax.
It seems to me that you should cecking this item for a.1.
According to IRS instructions: A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws.
You're certainly not treated as a US resident yet. So you should leave this item out.
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Hi, Yannick
Thanks for the information. Filing tax return has bothering me for a while.
I filed 1040EZ this year as a resident tax payer and claimed the tax treaty benefit at the same time. Unfortunately, I didn't file form 8833. Now, IRS asked me to pay the tax for the 5000 dollars.
Can you let me know how did you file your 1040? Where can you claim the tax treaty in the form?
Here is the second question. I am graduating spring next year, but I will have my green card next month. As a student and a green card holder, can I still claim the tax treaty when I file the tax return next year?
Thanks,
Serina
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Hi, Thanks for the information. It's very helpful. My situation is a little different than others. I'm a student from PRC and got married to a US citizen in 08'. My husband and I plan to file tax jointly. The question is - can I still specify the China-US treaty to get my taxes refunded? If so, what other forms that we need to fill out? (such as 8843, etc.)
Thank you
Yi
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Yi-
You can chose to file as a non-resident alien or a resident alien because of your marriage. As pointed above, filing as a resident alien and claiming the treaty benefit give you the most tax money back. I don't think you need to file differently than the forms mentioned above, since the instructions are for claiming the treaty benefit as a resident alien. Good luck!
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Resident or Non-Resident??
I have been in the US for more than 5 calendar years on my F1 visa, which means I should file as a resident alien. However in 2007 I was present in the country for less than 183 days on my F1, but also entered the country on a tourist visa which made it more than 183 days. Am I a non-resident or resident? Does the days that I was in the country with my tourist visa count?? Thanks Jan
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Hi, do you prorate the $5,000 treaty if you change your status from F1 to H1 during the year?
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Hi, I would never guess with those French names you are using you are from China!
Snork Maiden is also from the PRC. She has been using the tax treaty up till now and her W-2 reports her salary as $5000 less than it really is which I guess is due to her signing the treaty form. When I computed her 1040-EZ last night she ends up with a big refund because of the combined $8450 deduction/exemption. But then I thought: "How can you claim a tax treaty as a resident of China and simultaneously file as a resident for US tax purposes?" It seems you answer this here. Technically, I guess she would need to submit all that stuff. In practice I strongly doubt the issue will raised. Maybe for 2008 when she will probably still be OPT (unless we move to Europe or something) she could fill out all that stuff.
She already has signed an 8833 that the school gave her for the 2007 tax year.
I was only an F1 for 4 years so never ran into this issue back then. When I was a J1 visiting professor I claimed the United Kingdom tax treaty and got all my US taxes refunded for the 1 1/2 years I was under that status.