J1 visa tax treaty W2 and 1042-S

[sg281]

I am on a J-1 visa and previously filed Form 1040-NR for tax years 2022 and 2023. For 2024, I will need to file Form 1040. A portion of my salary was exempt under the U.S.-India tax treaty (Article 22) and is reported on Form 1042-S, while the remaining taxable salary is reported on my W-2 from the university.
When filing Form 1040, if I report the 1042-S income as 'Other Income' and enter it as a negative amount on Schedule 1, will this adjustment carry over to line 8 of the main 1040 form? Additionally, after applying the standard deduction to my W-2 income and factoring in the negative income adjustment based on the tax treaty, would line 15 of Form 1040 reflect a negative amount or default to zero?  Is this appropriate? Do I need to include Schedule OI?

Thank you!

[pk]

@sg281   Namaste ji

(a)   Because of the way  TurboTax works, the easiest way to exclude an income is to recognize  it  as "other income " -- showing up on  Schedule 1  line 1 z and follow that with an equal and negative number   again  as "other income" and  line 1 z  but with the  "exclude per  "US-India Tax treaty article  XX".  It is a clutzy way  but it works.  You have recognized the income and excluded it.

(b)  Note that  under the  treaty and per US technical explanation , if you stay post two year duration as J-1, US has the right to  collect back taxes on all the excluded income.  India uses "may" whereas US interprets this as "shall/will".   So please beware of this position / requirement.

 It is possible  for taxable income to become zero ( negative  defaults to zero).   For e-filing AGI must be a non-zero positive number.

Schedule-OI is not available for form 1040 --- your memo  for the  exclusion of  income on line 1 z    of Schedule-1should suffice.

Is there more I can do for you.

Namaste ji

pk

[sg281]

Thank you @pk , for the information 

Yes, I am aware of the wording of the tax treaty,  but I do not understand the best way to file the return.  Should the retroactive taxes be included in the return for 2024? 

Would I need to fill 8833 or 8843?

Thank you!

[pk]

@sg281 , 

I don't believe you need to file either of those forms --- 

     (a)    you are already disclosing the treaty  & article under which you are excluding income   -- which is what 8833 does

      (b)   you are no longer an exempt person nor over-staying because of exigencies -- which is what  8843 does.

Should you decide to  pay back  taxes  due to excluded income --- you have to amend  the returns of those years  -- each year stands on its own.  There may be  interest charges but  should be no penalty ( failure to pay, failure to file etc. ).  I would suggest strongly  that if you so decide , you should visit nearest IRS office and seek clarification. 

My personal opinion  , is  that  even though I understand why the  two year exclusion limit was placed  ( mostly to protect Indian brain drain ), I disagree with the US technical analysis  --   in that  India uses  "may" and not "will", "shall" and actually means it as seen from the Indian version of the  treaty and analysis.   But the issue here is   (a) there are no case law  that I could find that addresses this  and (b) even if you win an argument with the IRS, you still lose ---  in that there is tendency for them to pursue  enhanced  scrutiny for years  in the name " bring/ confirm  you into compliance ".  It is a losing battle.

Nor do I know  if these  "exclusions" are tracked or not and if so how >

Does this make sense ?

[sg281]

Thank you for your response @pk 

I want to confirm if I am filling in the wages & income correctly for the 1042-S.

1. Enter the 1042-S wage in the Less Common Income > Miscellaneous Income > Other income not already reported on a Form W-2 or Form 1099 as a positive number

2. Enter the 1042-S wage in the Less Common Income > Miscellaneous Income > Other reportable income as a negative number for applying the tax treaty clause.

I think it should be both, I enter my total income that is partly reported on W2 and 1042-S and then subtract the 1042-S from the total to report it as AGI. Now, after applying the standard deduction to W2, turbo tax shows that I will get a refund. If I mail my return which address should I mail it?

Thank you!

[pk]

@sg281 , yes you fill both --- recognize the income and then exclude it   per the  tax treaty article  + para. notation.    IRS already has the  1042-S anyways.

Is there more I can do for you ?

[sg281]

Thank you @pk