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I am in the USA on a J1 visa and thanks to a tax treaty with my country I am tax exempt for 2 years. Does this mean 2 tax years or 24 months?

For example, if I arrived to the US on August 1st 2012, does the tax treaty apply from Aug 1 2012 to July 31 2014, i.e. 24 months, or from Aug 1 2012 to Dec 31 2013, i.e. 17 months?

Is this the situation referred to as "dual status alien"?

I am primarily looking for references rather than an answer stating yes or no.

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As littleadv says, how the income tax exemption from the treaty works depends on exactly what the treaty says.

But for whether you are a resident alien or nonresident alien for U.S. federal tax purposes, that is determined completely by U.S. domestic law, and is a separate issue from treaty tax exemptions. Who is a resident is discussed in Publication 519.

You are a resident alien if you satisfy either the Green Card Test or the Substantial Presence Test. For the Substantial Presence Test, you are a resident for 2014 if (the number of days you are present in the U.S. during 2014) + (1/3 of the number of days you are present in the U.S. during 2013) + (1/6 of the number of days you are present in the U.S. during 2012) >= 183 days. Basically, if you are in the U.S. for half of the year, you meet the test, and even if you aren't, days from previous years can be counted in a certain proportion.

However, days are not counted in the Substantial Presence Test for people in certain statuses, the "exempt individuals". You didn't say what kind of J1 you have; if you were a J1 student, then you would be an exempt individual as a "student"; for any other kind of J1, you would be an exempt individual as a "teacher or trainee". However, whether you are an exempt individual also depends on whether you were an exempt individual in past years. A "student" is not be an exempt individual if they have been an exempt individual for any part of 5 previous calendar years. A "teacher or trainee" is not be an exempt individual if they have been an exempt individual for any part of 2 calendar years in the previous 6 calendar years.

Basically, if this is the first time you're in the U.S., this means that, if you are a student, you will be a nonresident alien your first 5 calendar years, and a resident alien thereafter; if you are a J1 and not a student, you will be a nonresident alien your first 2 calendar years, and a resident alien thereafter. So, for you:

  • If you are a J1 student, you are an exempt individual for your J1 time in 2014. None of your days are counted towards the Substantial Presence Test, so you don't pass it. You would be a nonresident alien for all of 2014.

  • If you are a J1 and not a student, you would not be an exempt individual for any part of 2014, since you have already been an exempt individual for some part of 2 of the last 6 years (2012 and 2013), and thus all of your days in the U.S. in 2014 are counted in the Substantial Presence Test, which you would pass for 2014. So you would be a resident alien for all of 2014.

In neither case would you be dual-status.

In many tax treaties, the tax exemptions do not apply to resident aliens, due to a "saving clause". If your tax treaty is like this, and if you are a resident, then you are not exempt from the tax. However, some tax treaties do not do this; e.g. the U.S.-China tax treaty's saving clause does not apply to the sections for students and researchers, so they can continue to use tax treaty benefits after becoming a resident. (The U.S.-China tax treaty has 36 months of income tax exemption for researchers, which usually falls over 4 calendar years, much longer than the 2 calendar years that they are nonresident.)

  • Publication 519 says, "Exempt individual. Do not count days for which you are an exempt individual." This suggests that this is decided on a day by day basis. Then: "Teachers and trainees ... You will not be an exempt individual as a teacher or trainee in 2014 if you were exempt as a teacher, trainee, or student for any part of 2 of the 6 preceding calendar years." This talks about years, not days. I'm a bit confused. But then is this correct? If I exclude any number days from the substantial presence test for 2012 and 2013, then I cannot exclude any days for 2014? – Shim Mar 16 '15 at 11:44
  • Also, is it correct that "exempt individual" simply means "if you are considered an exempt individual on a certain day, then you do not need to count that day towards the substantial presence test"? This whole tax business is ridiculously complicated, frustrating and hard to understand. – Shim Mar 16 '15 at 11:47
  • @Shim: Yes, exempt individual applies to days which you are exempt from the Substantial Presence Test, which counts days. You don't "exclude" -- whether you are an exempt individual for a day is determined by law, you don't have a choice. If you are a J1 nonstudent, for all the days in which you were in the U.S. in J1 status in 2012 and 2013, you were an exempt individual; and for no days in 2014 do you count as an exempt individual. – user102008 Mar 16 '15 at 18:20
  • Thanks, this is clear. No days must be counted as exempt in the 3rd year, i.e. 2014. Coming back to the original question, does the tax treaty apply for 24 months or for 2 tax years? It is the treaty with Romania, article 19(1). I looked through it a number of times, but I find it very hard to understand. For example, article 19(1) doesn't actually state anything, the sentence doesn't have a verb in it. It only says who it applies to, but it doesn't say what it is that applies. – Shim Mar 17 '15 at 1:40
  • @Shim: If it just says "year" then it means a period of 12 months, so it's 24 months, so your income in the first 7 months of 2014 are exempt from U.S. income tax. And the saving clause (in paragraphs 3 and 4 of Article 4) exclude Article 19 if you are in nonimmigrant status, so you get the treaty benefits even though you are a resident alien for all of 2014. – user102008 Mar 17 '15 at 1:53
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It depends on the actual treaty (so no references since you didn't tell which one it is), but generally it is 24 months. So if you started the clock from August, your exemption lasts till the end of July of the second year. On the 1040NR Schedule OI, you write down the months of the exemption that you've used for each year (line L).

Once the exemption expires your substantial presence clock starts ticking and you may end up being dual status alien for that year.

Dual status alien is a person who is only resident for tax purposes for part of the year. You file two forms: 1040NR for the non-resident portion of the year, and 1040 for the resident portion of the year.

  • I am confused now. So if the exemption expired in 2014, it may still not be necessary to file according to the instructions for "dual status"? According to the substantial presence test, I must have 183 days in total for the past 3 years, according to special rules, excluding any days during the exemption. The only way to have 183 days is if the exemption expired before 2014 Jul 1st (as there are 183 days left until 2014 Dec 31). My exemption expired after Jul 1st, so according to my understand I do not pass the substantial presence test. Does this mean I still file only 1040<b>NR</b>? – Shim Mar 15 '15 at 22:25
  • If you're exempting the days from the count for substantial presence - then yes. If you're only allowed to exempt the income then no. I don't know what the treaty says. – littleadv Mar 15 '15 at 23:15
  • @Shim BTW there's also a case where you can chose being part-year tax resident even if the substantial presence days allow you being non-resident. Some deductions can only be taken if you file as resident. – littleadv Mar 15 '15 at 23:58
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    The tax treaty has nothing to do with the Substantial Presence Test. Under the Substantial Presence Test, he is either a resident alien for the whole year, or a nonresident alien for the whole year. He cannot be dual status. – user102008 Mar 16 '15 at 22:07
  • @user102008 tax treaty can exempt days from substantial presence test, being dual status is a choice. – littleadv Mar 17 '15 at 5:23

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