Questions about reporting the 1042-S income exempt under tax treaty in Form 1040 and California state tax return

I am an F-1 Ph.D. student in Illinois and I was coming from China.  I am not in the US for more than five years so I am a non-resident for tax purposes. I married my wife in 2021 and she is a resident alien. So we elect to treat me, the nonresident spouse, as a resident alien for tax purposes and file a joint federal return (see IRS Nonresident Spouse).  Based on the US-China tax treaty, I may still claim my tax treaty for specific items even if I am a nonresident alien electing to file a joint return, because I am still qualified for the exception stated in the saving clause to the tax treaty (see IRS Pub 519 Students, Apprentices, Trainees, Teachers, Professors, and Researchers Who Became Resident Aliens).

 

My university has reported my fellowship (with income code 16 and exemption code 04 for box 3a, and the tax rate is 0.00) and other $5000  (with income code 20 and exemption code 04 for box 3a, and the tax rate is 0.00) in two separate Form 1042-S to indicate that they are exempted from federal tax based on the US-China tax treaty.

 

May I know whether I can use this method and the method mentioned by @AmyC  to report the income from my 1042-S in the Other Income as follows?

 

 

  • Click on Federal on the left-hand side of your screen
  • Click on Wages & Income
  • Scroll down to Less Common Income
  • Scroll down to Miscellaneous Income, 1099-A, etc
  • Click on Start or Update
  • Scroll all the way down to Other Reportable Income
  • Click on Start 
  • Add a Miscellaneous income item
  • Input description of your wages and wage amount
  • Input your Wages
  • Click Continue and Click Add Another Miscellaneous Income Item
  • Enter your treaty exemption as a negative number.  You cannot exempt more than your total wages.
  • The amounts will offset to zero.   You will be able to see both entries and descriptions on Schedule 1 of your tax return.

 

Second Option: I also notice other answers for reporting the 1042-S, where they are generally using other methods in TurboTax resulting in reporting the 1042-S income in line 1 Wages, salaries, tips, etc. Attach Form(s) W-2, and then enter the negative amount of all the 1042-S income on line 8 Other income from Schedule 1, line 10 such that the 1042-S income can be also offset to indicate they are exempt from tax treaty. 

 

For this method and the method mentioned by @AmyC, and the Second Option, all of them have the same adjusted gross income (AGI) in line 11 of Form 1040. However, when we are filing the California state tax return on Schedule CA (540NR), for this method and the method mentioned by @AmyC, I know that I need to add back the tax treaty exemption amount in Part II, line 1, Column C because the CA do not recognize the tax treaty. By this method and the method mentioned by @AmyC, the tax treaty amount is exactly excluded in line 1 in federal Form 1040 since the tax treaty amount is all reported in line 8 in Federal Form 1040 as 0. So it is fine that we must add them back in Schedule CA Part II, line 1, Column C using TurboTax such that Column D can precisely and correctly show our total income without exempting the tax treaty amount from 1042-S.

 

However, for the Second Option, the tax treaty amount is directly reported in line 1 of federal Form 1040 and only be offset by the negative amount reported in line 8 of federal Form 1040. Since the Schedule CA (540NR) directly uses the number in line 1 of federal Form 1040 to fill in Schedule CA (540NR) Part II, line 1, Column A (Federal Amounts), then it means that the tax treaty exemption amount is not excluded in the Column A. If so, then should I still add the tax treaty exemption amount back in Part II, line 1, Column C in Schedule CA (540NR)? If I add the tax treaty exemption amount back in Column C, then Part II, line 1, Column D in Schedule CA (540NR) will be larger than the total amount of our income since the tax treaty exemption amount is being added twice in Schedule CA (540NR) Part II line 1, i.e., being reported in both line 1 Column A and C.