I am a UK citizen that will be moving to the US to take up a research position in 2010. I will be in the US on a J-1 visa as a "Research Scholar" and will receive a stipend from the US institution I will be visiting. The length of the position is 2 years total.

As I understand it there is a US-UK tax treaty that allows exemption from federal tax if you are visiting the US for no more than 2 years. Does this 2 year period start from the date you arrive in the US? Or is it referring to the number of tax years you are present in the US?

For example:
If I arrived on 1st Jan 2010 and left on 31st Dec 2011 I would have been in the US for 2 tax years and everything is within the 2 year limit. However, if I arrived on 1st Feb 2010 and left on the 31st Jan 2012 my visit would span 3 tax years, thus would I then be eligible to take advantage of the 2 year exemption of the US-UK tax treaty?

To complicate matters I have already spent 3 years in the US as a Research Scholar on a J-1 visa - this was from March 2001-March 2004 (3 years). By the time I return to the US I will have been in the UK for about 5 years 9 months. Will I have to take this into consideration for taxation purposes when I return to the US in 2010?

Any help on this issue is greatly appreciated.
Agent UK.

It is possible that you'd be exempt from federal income taxes. You should talk with an accountant or tax attorney from the US to be sure. In all likelihood, your employer would initially deduct the taxes from your pay, same as with any other employee. Then you'd probably file a special form with the Internal Revenue Service to get the withheld taxes refunded to you. Your accountant/attorney can advise you on that as well. You might also want to research the IRS on your own:Internal Revenue Service (http://www.irs.gov/)

Agent UK:

There IS a retroactive tax clause if you exceed two years. The clock starts when you get off the plane and runs for 24 consecutve months. You pay the tax if you exceed the 24 months. You will need to complete special paperwork at the U.S. institution to make sure they do NOT withhold taxes.

You CAN do it twice, provided you return to UK and re-establish residency. The five years you have been in the UK is more than long enough; the normal minimum is usually ONE year.

Thank you both s_cianci and AtlantaTaxExpert for you replies. I trolled through the US-UK tax treaty last night (phew!) and have come to the same conclusion myslef, but it good to hear it from some else too. I am aware of the 2 retroactive tax clause but I have one question about that too.

The J-1 visa usually comes with one months grace period after it expires for you to leave the US. If I use that grace period (25th month) to leave the US and am not getting paid during that period (ie my last pay check is within the 24 month period), does the retroactive clause still apply? Does the clock stop ticking when I get back on the plane, or is it linked to the period of my contract for which I am getting paid?

Many thanks, Agent UK.

That has been an issue of some discussion between me and several other tax experts on this forum.

I believe that the IRS takes the attitude that, as long as you DO leave within a reasonable of time at the end of the two-year period, there is no penalty for extending your visit into the 25th month.

However, the other tax experts note that this fact is not written anywhere in the tax treaty, so it is possible that the IRS may take note of your late departure and try to impose the two-year retroactive tax.

I personally do not believe that the IRS would try to do this, simply because the IRS has better things to do than trying to track when ONE researcher enters and leaves the U.S. However, I cannot logically dispute their interpretation of the treaty as written.

I would say, to be safe, that you should endeavor to depart prior to the end of the 24-month period.

Interesting this is an issue with no real answer, but you are right to air caution rather than risk a 2 year tax bill for sake of a few days. Thanks once again for the info.

Glad to help!