J1 Visa - Teacher - Income tax exemption

[pisces03]

Hi there.

I would like to seek guidance on entering the return for a client who is here on a J1 visa as a teacher, working for a US educational institution.  According to the Tax Treaty Article 21, the teacher income is exempted under this treaty for the first 2 years.  The client came here in August of last year, 2019.

I put on Line L of Schedule OI the total income received (Box 1 of W2) as income exempt, this then went to Line 22 of the 1040-NR.  However, a tax is still calculated based on the tax table.

I couldn't find any other sections on ProConnect where to put the tax exemption - so under Other Income - Misc, I put the income as a deduction for both 1040-NR and CA 540-NR.

I want to know if this is correct.  I called the IRS and I was told that unfortunately the 1040-NR is an advanced tax law that the IRS Practitioner Hotline does not support.

I'd appreciate any inputs.  Thank you.

[George4Tacks]

https://www.irs.gov/individuals/taxation-of-alien-individuals-by-immigration-status-j-1

[pisces03]

Thank you, I appreciate your response.   I read that last night too.  In ProConnect, the only section you can put the tax exempt income is in Schedule OI of 1040-NR.  This amount flows to line 22 of the 1040-NR.  However, after the allowed Schedule A adjustment (which is the state income tax paid), it still calculated a tax amount based on a tax schedule as if the income is not exempt.  There's no tax due because the amount withheld from Federal wage is greater than the tax, so the client will receive a refund.  However, what I'd want to know if it is a valid strategy to put in Other Misc income section instead the income earned as a deduction so it nets to zero, then just put the Tax Treaty Article 21 on the description portion.  I did this and obviously there was no tax calculated, and the refund is the full amount of the tax previously withheld from the paycheck.

Please let me know if putting the (-) income in Other Misc is acceptable.  Thank you.

[itonewbie]

First thing first, which treaty are you referring to?  This is important as different treaties have different criteria and limits for the exemption.  Income paid to teachers is not exempt unless those conditions are fully satisfied and the income is within the limit.

Also, Article 21 usually refers to Students and Trainees, whereas Article 20 governs Teachers.

Second, you are filing a 1040NR.  I suppose your client did not satisfy substantial presence test by default.  You should also consider whether your client should qualify as an exempt individual as this affect not only your client's resident status in 2020 but also FICA liabilities.

You also mentioned your client receive a W-2.  Educational institutions are generally very up to date on the application of domestic tax law and treaty exemptions on J-1 (as well as F-1) visa holders, including certificates that need to be submitted for exemptions for withholdings.  If they did issue a W-2, that is an indication that something could be amiss.

It is correct that the amount from Line L will flow to 1040NR Line 22 for information only.  That number does not add to Line 23 or anywhere else.  If you can provide a redacted screen capture or the numbers shown on the return, we can take a second look.

If I understand your message correctly, you are also looking at exempting your client's compensation from CA tax.  CA has it's own residency rules, which do not follow the IRC, and does not recognize US income tax treaties.

[pisces03]

Hi there.  

Thank for your input.  Here is the screenshot of Article 21 of the Tax Treaty between US-Philippines:

ARTICLE 21
Teachers

(1) Where a resident of one of the Contracting States is invited by the Government of the other
Contracting State, a political subdivision or local authority thereof, or by a university or other
recognized educational institution in that other Contracting State to come to that other
Contracting State for a period not expected to exceed 2 years for the purpose of teaching or
engaging in research, or both, at a university or other recognized educational institution and such
resident comes to that other Contracting State primarily for such purpose, his income from personal
services for teaching or research at such university or educational institution shall be exempt
from tax by that other Contracting State for a period not exceeding 2 years from the date of his
arrival in that other Contracting State.

(2) This article shall not apply to income from research if such research is undertaken not in the
general interest but primarily for the private benefit of a specific person or persons.

It's the first tax return filing of the client as the visa started in August 2019 so the client qualifies for first 2 years of income tax exemption under that treaty.  In the W2, Fed income taxes were withheld.  For J1 visa holder, as I know FICA and Medicare taxes are not deducted.  Are these the only taxes they're exempted from? Or is it including FUI?

I tried to run a trial refund on j1taxrefund.com using the wages and withholding information for the client.  It looks like the refund amount is very close to what I'm seeing in ProConnect as the client refund.  As in my previous post, there was a tax calculated based on the tax table, less withholding, and the client gets a refund.  

Thanks.

[itonewbie]

Yes, that's an antiquated tax treaty with the Philippines.  Can't tell from the limited info you shared whether your client met all the conditions but we'll assume he does based on your review.  It is apparent your client and the school did not follow the proper process to exempt the treaty-exempt income from federal tax withholding and a refund claim would need to be filed with the return.

FICA already includes Medicare tax.  It consists of both OASDI and Medicare.  These are exempt provided your client is a nonresident alien on a J visa.  You may like to re-read my original post for the conditions, which your client does not automatically satisfy just by being a teacher on J-1.

FUTA is an employer liability and not a concern of your client but, yes, it is exempted under a different section of the Code.

I don't know what j1taxrefund.com is, so can't help you there.  But as I explained before, Line 22 is only there for information purposes and the amount does not get added to the taxable income.

[pisces03]

Thank you,  I appreciate your help 🙂