tax treaty benefits

[sidewinder2]

Hello,

I am on an H-1B and became a resident alien for tax purposes in 2020). Moreover, due to a tax treaty my wages are exempt from federal and state taxes. However, my employer withheld taxes for the first month of employment.

Specifically, my employer withheld federal and state income taxes for Jan 2020 but not for the remainder of the year. Moreover, my W2 only reported my wage from Jan 2020 and a moving allowance (not covered by the tax treaty) but not the wages for the rest of the year.

My question is:
- how do I report the income that was not reported on the W2 because it was tax exempt? Do I have to report it all?

- how do I claim the tax treaty benefit for Jan 2020?

As suggested in some of the other posts I am using "Less common Income" -> "Miscellaneous Income" -> "Other reportable income" to subtract the wage for Jan 2020 that should have been tax exempt and would include all the paperwork again that I submitted to my employer for the withholding tax exemption.

[jtax]

This is a very complicated area. I'm not sure you should be relying on free advice from a volunteer forum. Rather you should probably seek the professional advice or a certified financial planner (CPA), enrolled agent (EA), or tax attorney who specializes in this area.

That said this prior post

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/how-to-claim-a-tax-treaty-with-t...

describes doing something similar to what you mention. But it also says you need to file form 8833 on paper, which discloses that you have made an income subtraction based on a treaty (and exactly which part of the treaty applies). You might well want to read the instructions and or section 6114 or 7701(b) and the regulations to see if that applies to you:

https://www.irs.gov/forms-pubs/about-form-8833

https://www.law.cornell.edu/uscode/text/26/6114

https://www.law.cornell.edu/cfr/text/26/301.6114-1

https://www.law.cornell.edu/uscode/text/26/7701

The text of tax treaties are here: 

https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z

Unless the treaty says otherwise or you find an exception as if you are a US resident (or citizen) you must report all of your income. Whether or not you got a W-2 or other information form doesn't matter. Perhaps there is an exception for this treaty exemption and that's why your employer didn't issue one. I don't know.

See this for general IRS info on US taxation of those with H-1B visas, especially "Interaction with income tax treaties"

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

It is unusual that a treaty says you don't have to pay US tax if you live in the US. Most tax treaties say you pay tax in the country you live in and the other country can't tax out.

To get back the social security and medicare withheld in error see this info. It appears to be a separate process (because those are not "income taxes" but the IRS does collect them.) This appears to say your employer should refund you those taxes but if they don't file this form (by itself and without your income tax return, I expect).

https://www.irs.gov/individuals/international-taxpayers/social-security-tax-medicare-tax-and-self-em...

[sidewinder2]

Thanks a lot for the detailed response and links to relevant resources. I agree it is complicated topic and I certainly did not want to discus the applicability of specific treaty articles in a volunteer forum. A specialist concluded that the treaty article is applicable and that there is an exception to the saving clause that allows to claim it (for a limited time) after becoming a "resident for tax purposes". However that specialist cannot help with the tax return.

My (naive) view was that I would "only" need to know how to report this income. There is quite a bit of (non-professional) advice floating around that suggests to declare the total income in line 1 of form 1040 and declare a negative amount in line 8 and note the tax treaty and specific article next to it. I guess I need to consult a specialist on the tax return as well.

btw. Thanks for pointing me to section 6114, in my (non-professional) understanding it waives the reporting requirement (i.e., form 8833) for my specific case.

[jtax]

When you say sec 6114 waives the requirement in your case, I assume you mean the regulation 26 CFR § 301.6114-1(b) as the statute doesn't have any waivers in it. 

If you are covered under a waiver in the reg then I you may be good. See below. The regulation is very authoritative if it clearly applies to you. 

How confident you need to be is, in and of itself, not a simple matter. Take a look at 

https://www.irs.gov/pub/irs-utl/2018ntf-what-is-your-authority-for-that.pdf

slide 7+ ("Reduction of the Understatement") ... part of the complexity is that you need to understand if you are taking an "undisclosed position" or if you are disclosing. If you filed the 8833 I'd say you were certainly disclosing. But if there is an exception, then is noting the treaty deduction on the return as you suggest sufficient? I don't know. It might not be because the IRS can't really read all such comments unless a human being audits the return. That's what the 8833 is for -- putting the IRS on notice and their computers can look out for 8833's that look suspicious. 

This table is from a 2007 article so it might be outdated but you get the idea. Taxpayers are held to a lesser standard than professionals are.  https://www.journalofaccountancy.com/issues/2007/oct/accountingforuncertainty.html

Exhibit 1		Tax Reporting Inclusion Thresholds
	2008 Pre-2008   Applies to: Auditors Tax Practitioners Tax Practitioners Taxpayers Applicable Standards and Threshold More-Likely-Than-Not More-Likely-Than-Not Realistic Possibility (1) Substantial Authority (2) Reasonable Basis Threshold Probability Over 50% Over 50% Over 33% Not over 50% but more than a reasonable basis (perhaps 25%) Threshold Source FIN 48 IRC § 6694(a) (SSTS and Cir. 230 likely to change) (1) IRC § 6694(a) (2) SSTS no. 1 (3) Circular 230 § 10.34 (1) Reg. § 1.6662-4(d) (2) Reg. § 1.6662-3(b) Consequence for Not Meeting Threshold Potential legal and professional liablity (1) Greater of $1,000 or 50% of income derived (2) Unable to sign return without disclosure (SSTS no.1 and Circular 230) (1) $250 per occurrence penalty (§ 6694(a)) (2) Unable to sign return without disclosure (SSTS no.1 and Circular 230) 20% penalty on the understatement of tax