Can I claim standard deduction under US-India Tax Treaty Article 21(2) if my visa changed from F1 to H1B?

[feuerfawkes]

Hi,

I was on F1 student visa from January 1, 2022 to September 30, 2022. My visa changed to H1B on October 1, 2022. I entered the United States in August 2018 on F1 visa, and based on the substantial presence test, I am filing as a non-resident alien for 2022 tax purposes. I am a citizen of India.

My question is whether I can claim the standard deduction under US-India Tax Treaty Article 21(2) for 2022 given that I was on the F1 student visa only for 9 months in 2022.

ARTICLE 21

Payments Received by Students and Apprentices

1. A student or business apprentice who is or was a resident of one of the Contracting States immediately before visiting the other Contracting State and who is present in that other State principally for the purpose of his education or training shall be exempt from tax in that other State, on payments which arise outside that other State for the purposes of his maintenance, education or training.

2. In respect of grants, scholarships and remuneration from employment not covered by paragraph 1, a student or business apprentice described in paragraph 1 shall, in addition, be entitled during such education or training to the same exemptions, reliefs or reductions in respect of taxes available to residents of the State which he is visiting.

3. The benefits of this Article shall extend only for such period of time as may be reasonable or customarily required to complete the education or training undertaken.

4. For the purposes of this Article, an individual shall be deemed to be a resident of a Contracting State if he is resident in that Contracting State in the taxable year in which he visits the other Contracting State or in the immediately proceeding taxable year.

See publication 901, page 22, India for more information: https://www.irs.gov/pub/irs-pdf/p901.pdf

[feuerfawkes]

@DaveF1006 @Opus 17 @tagteam @xmasbaby0 

[tagteam]

I am not going to be of much use on this one but probably @pk will.

[Opus 17]

In general, an F visa is a student visa.  You are considered a non-resident, and you are not allowed to work.  You can receive income as a student (stipend, etc) and you file a non-resident tax return.

An H visa makes you eligible for work and you are considered a resident for tax purposes.

That means that for 2022, you are a dual-status alien.  You need to calculate your taxes twice, once for your non-resident status and separately for your resident status.  Turbotax does not prepare non-resident tax returns or dual-status returns, you would have to find another provider.  (I don't remember if you actually file the two separate returns, or if you combine them somehow.)

https://www.irs.gov/individuals/international-taxpayers/taxation-of-dual-status-aliens

There are general rules for dual-status aliens at that IRS link but I don't know if the tax treaty modifies them. 

Since your return is due in a few days, I think you should get an extension. This may take a while to figure out.

I agree  @pk  is the ultimate authority on tax treaties. 

[feuerfawkes]

@Opus 17 Thank you for your response. In 2022, I was authorized to work off-campus on F1-OPT from January 1 to September 30. My H1B took over from October 1 (change of status), and I continued working on the same job. Can you clarify why I would be considered as a resident for tax purposes under H1B?

I do not meet the substantial presence test (SPT) for 2022 as I believe I can exclude all the days of presence while I was on F1 since 2018. From my understanding, I need to start counting the days from October 1, 2022, which add up to only 92 days and are not enough the meet the SPT. Based on this calculation, I will be a non-resident alien for all of 2022.

I have read about First-Year Choice in publication 519 on page 8. I understand that I can choose to be considered as a dual-status alien for 2022 once I meet the SPT later in 2023, for which I will need to file an extension. However, I do not wish to choose this path as it does not provide me additional benefit and makes things more complicated.

[Opus 17]

@feuerfawkes 

you are correct that if you do not make the first year choice, the substantial presence test means you are a non-resident for 2022. TurboTax can’t prepare nonresident tax returns, and I think pk is the only person around here who might even have a ghost of a chance of knowing how to answer your question as it pertains to a non-resident tax return.  

[pk]

@feuerfawkes , Having read through this chain and generally agreeing with  @Opus 17 , would like to add the following:

(a) Not having met the Substantial Presence Test for the year 2022 and absent any request to be considered  a Resident for Tax Purposes, you are a  Non-Resident Alien  for the year 2022

(b) you therefore  file your return on form 1040-NR  ( Not supported by TurboTax --- see SprinTax, Your School Foreign Students Office, Tax professional, download  "fillable"  forms from IRS etc. )

(c) As a student/Trainee from India you would indeed come under  "treated as  US students " of  Article 20  of US-India Tax Treaty.

(d) However, the questions here is Are you a student / trainee?  Mostly students  while in OPT / CPT / Gap are on F/J/M visa.  H-1 mostly implies that your employer has requested  employment visa for you  ( even though there are cases when a student/ trainee is with H visa).   Please could  you provide more details  of your situation -- when arrived, Which country ( India ), is this the first entry etc. etc.  I ask this because  if you are not considered  "student/Trainee" then using 1040-NR would require you to use Itemized deduction.

I will circle back once I hear from you --yes?

[feuerfawkes]

@pk Thank you for your response. Here are some more details about my situation:

1. I am an Indian citizen who arrived in the US from India in August 2018 (first ever arrival) on F1 as a student.

2. Graduated from the university and started working off-campus in the industry in mid-October 2021 on F1-OPT (still a student but under the training phase).

3. Changed my F1-OPT status to H1B (sponsored by my employer) on October 1, 2022 and continued working for the same employer.

4. The only form that I received for 2022 taxes is the W-2 from my employer. That's all my income for the year.

From my understanding, I was a student until September 30, 2022 but not after that. If my understanding is correct,

1. Can I still claim standard deduction on my whole income as per US-India treaty mentioned above given that I was not a student for the entire year?

2. If the above answer is no, then can I claim at least claim the standard deduction on the part of the income I received while I was a student on F1-OPT?  (if it makes sense to do so)

Thank you for your assistance.

[pk · Accepted solution]

@feuerfawkes , Namaste ji

1. If your aim is to reduce your taxable income by using standard deduction, don't think you can do it because  you are  caught between two options ( rock and a hard place :(

(a) if you left things as they are you do not meet the  SPT and therefore you file the form 1040-NR with required  itemized deduction OR

(b) you request to be treated as a Resident for the tax year 2022.   Here  while you would meet all the sundry requirements , have to wait till you pass SPT in 2023, your first day of the Residency  for the year is the first day of presence  in the States.  However you cannot count any days that would have been otherwise "exempt --  your exempt days end on  status adjustment Oct 1, 2022.  Thus  because there is no way to allocate standard deduction, you are back where you started.

I am sorry to bring you  info that you did not want to hear , but thems the  breaks --

Is there more I can do for you ?

[feuerfawkes]

@pk Thanks a lot for clarifying that I cannot claim standard deduction given my situation. Actually, Sprintax suggests that I qualify for the standard deduction -- I am not sure if it's accurate. Indeed, it is disappointing to not be able to claim the standard deduction this year despite being a student for 9 months of the year. Regardless, filing the taxes correctly is more important to me and will do so. Thanks again for your help.