J-1 status change at the end of the yaer: what happens to federal income tax exemption under tax treaty?

[amartincuks87]

Hello,

I hold a J-1 Research Scholar status since 2018. Years 2018, 2019, 2020 and 2021 I claimed federal income tax exemption under tax treaty with 1042-S form (Income code 16). My treaty has 5 year maximum presence, which means that 2022 is the last year I can claim the exemption. On December 18th I am expected to switch to H-1B with my employer and so I have two questions:

Since from Dec 18th I am no longer J-1, I will not be able to claim the exemption anymore, correct? And if so, I will no longer be exempt from federal income tax on income received after December 18th, but income received before December 18th (since I am currently still J-1 and fall under 5 year limit rule) should still be exempt and I could expect 1042-S form from my employer in March 2023 covering federal income tax exemption for my 2022 income up to December 18th?

Thank you for your help!

[tagteam]

@pk (again)

[pk]

@amartincuks87 , whereas I generally agree with your conclusions :

(a) Change of status H-1B  quenches benefits available under other immigration status

(b) Treaty benefits may or may not be affected , depending on the actual wording of the treaty.

However, I am not sure I understand the totality of your past situation.   So please can you tell me a little bit more --  What country are you a citizen of ?  When did you enter USA and  with what visa?  Was this your first entry or were there other earlier entries ? What treaty conditions were you asserting?

I ask these because for most treaties, the J-1 non-taxing by US is limited to 2 years, the five years of exemption from counting presence id valid only for F-1. So I need to understand the situation/ scenario. facts and circumstances.

pk

[amartincuks87]

Thank you for your reply.

I am a citizen of Latvia. I entered USA with my J-1 visa in February 2018. It was my first time entering US and I have never had any other entering status other than J-1. I was exempt from Social and FICA for tax years 2018 and 2019 as a non-resident. Since tax year 2020 I pay social and FICA as a resident, but I still am exempt from federal income tax (page 11 of Tax Treaty Table (Article 20(1)) , I get 1042-S form along with my W-2 with income code 16), since federal tax exemption is separate from Social and FICA and is limited to 5 years. Treaty citation:

ARTICLE 20
Students, Trainees and Researchers
1. a) An individual who is a resident of a Contracting State at the beginning of his
visit to the other Contracting State and who is temporarily present in that other
Contracting State for the primary purpose of:
...
(iii) studying or doing research as a recipient of a grant, allowance, or
award from a governmental, religious, charitable, scientific, literary, or
educational organization;
shall be exempt from tax by that other Contracting State with respect to the amounts described in
subparagraph b) of this paragraph for a period not exceeding five years from the date of his
arrival in that other Contracting State.
b) The amounts referred to in subparagraph a) of this paragraph are:
(i) payments from abroad, other than compensation for personal services,
for the purpose of his maintenance, education, study, research, or training;
(ii) the grant, allowance, or award; and
...

Hope this clarifies my situation better

[pk]

@amartincuks87 , as you pointed out , you are exempt from paying US taxes on the first five thousand  of personal service earnings  (by asserting Treaty benefits  article 20 paragraph a and b) for a period of five years.   For clarification  please also read the  technical explanations  available at -->  https://www.irs.gov/businesses/international-businesses/latvia-tax-treaty-documents

 As I read the treaty and the technical explanations, my impression is that  till you change  your visa status  ( J to H1 ) you are safe as a student/trainee/researcher category and the article 20 is applicable.  Once the adjustment is made however, you are an employee and no longer a researcher for public good.   Your five years are not up till 60 months from the date of arrival  and therefore should still be applicable for the year till status change occurs.  What is not clear is if the US$5000 exemption needs to be pro-rated or available  for the  tax year ( assuming  that Latvia is talking about US tax year  which is a calendar year.  Personally, I would feel more comfortable  with a pro-ration i.e. $416.66 per moth  covering the period from Jan 1st till the status adjustment date.

IMHO

pk