Hello,
I have a question related to the non-resident alien/resident alien problems. More in detail, I have a question about the exemption under international agreements between USA and my country Italy.

Briefely, I describe my situation.
I am an Italian citizien. On the 3rd of September 2002 I arrived in the USA under J-1 VISA (after March 2005 I started the H1B VISA). I was here as a teacher/researcher. For the ENTIRE 2002 I was supported by Italy. In the year 2003 I was supported by Italy as well until October 2003. In November 2003 I started working as a research associate at the University. Therefore, I had a US income source only for the months of November and December 2003. The University asked me to fill out forms W4 and 8233, including the Attachment to Form 8233 (Article 20-Teachers and Researchers). Eventhough I was exempt from paying taxes in 2003, I DID pay all taxes in 2003.

In 2004, I claimed that I was exempt and the University returned me some money (see point 2 below). I believed that this refund was related to the year 2003. Therefore, I did not file any tax return for the year 2003.
I filled out forms W9 and 8233 in the year 2004.

This year (2005), I did some "investigations" about what the University was doing on my taxes. Basically, I found out the following information:

1) I paid all taxes in 2003 (Social Security, Medicare and Federal) but I was 100% exempt under article 20 of the treaty USA-Italy.

2) The refund I was talking about above was related to the federal taxes for the first two months of 2004. Therefore, from a practical point of view, I did not pay any federal tax in the year 2004 until August 2004. I concluded that I was considered exempt.

3) The University DID NOT consider me exempt from Social Security and Medicare taxes in the same period (January-August 2004).

I spoke with my employer about all the issues. The University is going to refund me the Social Security and Medicare taxes for ONLY the year 2003. For the Federal taxes of the year 2003 I will ask the IRS for the full refund using the form 1040NR-EZ. The issue is about the year 2004. The University is NOT going to refund any Social Security or Medicare taxes for 2004. I had 2 years exemption and so I should not pay anything. However, in 2004 I became a resident alien and AFTER that date (which should be on August 2004) I was supposed to pay those taxes. Please tell me what I have to do. Before this discovery, I filled out the 1040EZ form for the year 2004. It was returned to me by IRS because I forgot to attach the form W2. After all these findings, I am going to attach form 1040X and form 1040NR-EZ for the year 2004 (in these forms I have to write the portions of income for which I was exempt and the portions for which I was not). Then I am going to file form 1040NR-EZ for the year 2003 in order to have the federal tax back and, finally, I am going to file form 843 in order to claim the social security and medicare taxes held by error in the period of Juanary-August 2004.
Is everything I said right?

I'm exempt from paying taxes (social security, medicare and federal) for 2 years (my Country is Italy). I arrived in the US on September 2002. Does my exemption end in August 2004 (2 years after my arrival date)? For the year 2004, am I exempt only from paying Federal taxes or the exemption is total (100% tax free)? If yes, I'm supposed to start paying taxes in September 2004. Right?

Please answer these questions as soon as possible.

One last question: in my case, I was considered non-resident alien until August 2004. Is it right?Thank you again,
Traianus

AtlantaTaxExpert

lcer75:

IMHO, you qualify for Article 20 of the U.S.-Italy Tax Treaty and should be exempt from any taxes on income earned while on your fellowship. If you make SAO aware of this fact, they will not withhold any taxes.

It is possible, however, that Italian taxes may be due. This is not my area of expertise, so I suggest you check with someone with expertise in Italian tax law.

traianus

This post is for the record and because I like to tell you how the story ENDED.

About the 2003 I had ALL my taxes (social security + federal) returned. About the 2004 the approach I followed was correct: exemption federal taxes until the experation of the two years exemption, but I paid the social security taxes. I also had a tax return because I paid more than I should have. Hopefully my experience will help other people in my situation. Good luck!

lcer75

Thanks Atlantataxexpert,
I have asked SAO resonsible to verify my situation but their first response has been that I don't qualify because article 20 is only for teachers/professors and I'm just a researcher. Then are all researchers excluded in that article?

traianus

Very often researcher are considered as well. You should read all the details in the rules.

AtlantaTaxExpert

Agree with Traianus. Researchers are often considered teachers/professors when they conduct their research with academic institutions such as universities.

Just my humble opinion.

traianus

I have now a changed situation.

I bought a house in Italy and I pay mortgage there. I also pay annual properties taxes. The house is considered "first home" in Italy under the tax law. My parents are living there. I pay the mortgage but I live in The USA where I rent a place. I do not have other properties in The USA.
I also have a very old and in bad conditions (you can not live there) a small house in a small town in Italy. It was my grandfather's and now it is mine. I pay the properties taxes in Italy (the city in which the house is located asks money for the public services).

Now the question: should I declare the houses in the TAX in The USA even if they DO NOT produce income (actually the produce expenses).

Other question: if in the future I like to buy a property in The USA, will it be considered first home?

Thank you!!!!

AtlantaTaxExpert

You CAN claim the interest paid on up to TWO properties as an ITEMIZED expense on Schedule A if you are filing as a resident alien. It does not matter where the property is located. If you are paying this interest to a foreign bank, you must identify the recipient of the money on the Schedule A.

The real estate taxes on these properties are also deductible as an itemized deduction on Schedule A, but, again, only if you are filing as a resident alien.

If you claim these properties, you will have problems claiming deductions for any U.S.- based house.

traianus

Thank you! So, you suggest to no claim the properties in Italy and then do it when I buy a property in The US?
I am resident alien (H1B VISA and hopefully Green card soon). Which form should I use? I used in the past 1040EZ

AtlantaTaxExpert

No, not necessarily. When you get a U.S.-based property, you will have to STOP claiming the second house in your home country.

You will need to file Form 1040.

traianus

Thank you. Should I have a proof of the interests paid such as the bank statements (in Italian)? Should I attach these proof in my form 1040? I do not have idea how to do it. Please help!