Hi,

I am preparing Form 1040NR (or 1040NR-EZ) for my 12-month OPT under a F1 student visa. I am a citizen of People's Republic of China and I received Form 1040-MISC from my employer for the work I did during my OPT.

I would like to know whether my income is partially or totally exempt from tax under the terms of U.S.- China Tax Treaty. According to Article 20 from the U.S. - People's Republic of China Income Tax Convention, it seems that my income is exempt from tax. I would appreciate it if anyone with tax expertise here can confirm me on this.

The following paragraph is from the U.S. - People's Republic of China Income Tax Convention, which is published on www.irs.gov.

ARTICLE 20
(Students and Trainees)

A student, business apprentice or trainee who is, or was immediately before visiting a Contracting State, a
resident of the other Contracting State and who is present in the first- mentioned Contracting State solely for the purpose of his education, training or obtaining special technical experience shall be exempt from tax in that Contracting State with respect to:

(a) payments received from abroad for the purpose of his maintenance, education, study, research
or training;

(b) grants or awards from a government, scientific, educational or other tax-exempt organization;
and

(c) income from personal services performed in that Contracting State in an amount not in excess
of 5,000 United States dollars or its equivalent in Chinese yuan for any taxable year.

The benefits provided under this Article shall extend only for such period of time as is reasonably
necessary to complete the education or training.

Thankfully,
Mayline Wu

AtlantaTaxExpert

Mayline Wu:

Certain types of payments are exempt from U.S. income taxes, but income received under a Form 1099-MISC is not exempt. It must be reported on Form 1040NR/1040NR-EZ, along with a Schedule C. The Schedule C will also allow you to claim certain business-related expenses to reduce the taxable income.

As a Chinese citizen, you are allowed to claim a standard deduction of $5,000 as specified under (c) below. If your Form 1099-MISC income is less than $5,000, you should still report it as specified above, but no taxes will be due. Further, no self-employment taxes are due, as nonresident aliens under the F-1 visa are exempt from self-employment, Social Security or Medicare taxes.

alen72035

Thank you for your prompt reply. I have three more questions:

Question 1)
As you know, I am a Chinese F1 student who is preparing for my income received with a 1090-MISC form during my OPT in 2004. I am a single female Nonresident Alien with no dependent so I figure I should use 1040NR-EZ, instead of 1040NR. Am I correct?

Question 2)
I can claims some business-related expenses using 1040 Schedule C, as my income was reported on a 1090-MISC. But how should I file both 1040NR-EZ and 1040 Schedule C together? Should I fill out the 1040 Schedule C first and then put my net profit (after claiming business-related expenses) in line 3 on 1040NR-EZ (i.e. Wages, salaries, tips, etc.)?

For example, suppose that I earned $20,000 in 2004, as indicated on the 1090-MISC. I claimed $5000 business-related expenses on 1040 Schedule C and calculated my net profit to be $15,000. Can I enter $15,000, rather than $20,000, on line 3 on 1040NR-EZ?

If I have to enter $20,000 on line 3 on 1040NR-EZ, exactly as it is on the 1090-MISC, then how do I move to 1040 Schedule C to claim my business-related expenses?

Question 3)
I can claim $5000 wages exempt on line 6 on 1040NR-EZ according to U.S.-China Tax Treaty. But I cannot really subtract the $5000 from my taxable income on line 14, after I followed the instructions for 1040NR-EZ. Does this mean that I have to pay tax "in full" and the $5000 exempt will be returned to me next year? What if I will not be in U.S. next year?

I would really appreciate any advice from you. Thanks you in advance.

Mayline Wu

AtlantaTaxExpert

Mayline:

I answer your private query.

You must use Form 1040NR, not Form 1040NR-EZ, with Schedule C.

cocoviolet

Just to follow the discussion since I am in a very similiar case --

I am also a chinese citizen and was under OPT in 2004. I received 1099-misc form OVER $5,000. I have another $300 income from W-2

Can I deduct the $5,000 from my total 1099 and W-2 form income as indicated in the tax treaty and put the substracted amount under "gross receipts" in the C-EZ form?

Thank you!

AtlantaTaxExpert

No, do NOT claim the $5,000 on Schedule C/C-EZ.

The $5,000 has to be claimed on the Form 1040NR where itemized deductions are claimed.

cocoviolet

Dear Atlanta tax expert,

Thank you for your fast reply. If I put $5000 under the itemed deduction of form 1040 NR (not 1040NR-EZ), it asked me to fill in Schedule A, where there's no where I can put the tax treaty deduction in it at all. ( I am not an indian citizen. I am a Chinese citizen)

I am pretty confused.

Also, Shall I fill Schedule-SE together with Schedule C?

Third, since I am deducting $5000 from my combined income of W-2 and 1099, and the amount on W-2 is only $300, I left the Line 8 (Wages, Salaries, Tips <attach form W-2>)blank. Therefore should I put $4,700 ($5000-$300) under the itemized deduction if that's right place to put?

I am so sorry to ask you these questions. This is the first time I do tax and I've already spent two days on it. Really respect your expertise!

Thank you, tremendously!

Violet

AtlantaTaxExpert

Violet:

On Line 8, put the $300 from your W-2.

On Line 22, do not put your scholarship. That is not taxable under normal circumstances.

However, do put $5,000 on Line 22. What I said earlier about putting the $5,000 on the Itemized Deduction (line #36) was not accurate (though it would have the same effect). On Page 5, you need to cite the tax treaty article pertaining to the $5,000 exemption

On Schedule C, enter the Form 1099-MISC income, then deduct the $5,000 as Treay-Exempt income on Page 2 of the Schedule C. This assumes that the Form 1099-MISC exceeds $5,000. If it does not, the figure from Schedule C (which is entered on Line 13 of Form 1040NR) will then be a negative number. That will offset the $300 W-2 income.

Sorry for the confusion. That's what I get for trying to answer questions on the fly without adequately researching them.

cocoviolet

Wow!!! Thanks Expert! That was so fast! one last question though: I am fling Schedule C-EZ instead of Schedule C. And there's no where to put tax treaty $5000 on C-EZ ...

(And I don't need to file Schedule-SE, do I?)

Really hope it doesn't take you too much time to answer my questions.

BTW: I love Atlanta... onced worked for CNN as an intern

AtlantaTaxExpert

Violet:

Sorry, to do what I instructed, you need to use Schedule C, not Schedule C-EZ. The Schedule C allows you to specifically identify the reason for the $5,000 deduction, and in your situation, you do not want to be cryptic with the IRS.

If you converted from F-1 to H-1B, then you are liable for Social Security and Medicare taxes during the H-1B visa time. Therefore, if you earned the Form 1099-MISC income while you were under the H-1B visa, then you must prepare the Schedule SE and pay self-employment taxes.

You do not have to file Schedule SE if you are under a F-1 visa for the entire year or you earned the Form 1099-MISC income while you were under the F-1 visa.