I have a question regarding the income exempt by the US - India tax treaty. I was a student from Jan 04 to Jun 04, then on a OPT from Jun 04 to Oct 04 and on a H1 from Oct 04 through. I have a W2 from my University (for part of the summer that I was working over there), a W2 from my employer (starting June 04) and a 1042 S for the spring semester (Jan to Apr).
Income reported on 1042 S was a felowship that I received from my university for my expenses (7500$ for spring sem). I also got a waiver for my tution, but that was not reported (as I believe tution and fees is exempt from taxes).
Last year I received a 1042 S for the entire year (15000$) and I was advised by the International Student Association that I can claim tax treaty exemption for the entire amount. I was reading through the IRS publications (pub 901) for students and apprentices and it seemed that I was wrong in doing so.
An individual who is a resident of India immediately before visiting the United States and who is temporarily in the United States primarily for studying or training is exempt from U.S. income tax on payments from abroad for maintenance, study, or training. The exemption does not apply to payments borne by a permanent establishment in the United States or paid by a U.S. citizen or resident, the U.S. Government, or any of its agencies, instrumentalities, political subdivisions, or local authorities.
And univ being a permanent establishment in US we won't be able to claim this exemption. But most colleges seem to advise their Intl students to do the same thing. (see link for RPI for this year)
http://www.rpi.edu/dept/doso/ISSS/pu...0returns.ppt#2
See the example for the korean student who claims both scholarship and wages for tax treaty exemption... that is what they claim Indian students should do too (but since there is no limit on max amount of compensation on our treaty, they say we can claim full amount)
I am confused as to what to do at this stage. Are they accurate in their reading of the situation that we can claim all our compensation (on 1042 S) as exempt from taxation?

Kalyankumark:

Your's is an exceptionally complex case, thoug I believe you are reading too much into your $15,000 fellowship not being exempt.

I recommend you post your question to www.thetaxguy.com. This individual specializes in tax returns for resident and nonresident aliens.

I will do so...
But I didn't get you.. so u think I am entitled to take the 15000$ exemption last year? (and the 7500$ this year? )
May be superfluous questioning but couldn't resist...

I did not phrase it correctly. I do believe you were entitled to the exemptions you claimed. I thought that you had doubts.

I have a friend who have claimed the entire amount reported on 1042-S as India-US treaty exempt. IRS has accepted it and refunded accordingly.

But on reading that India-US tax treaty I cannot find a provision by which income reported by 1042-S (income code 15 and exemption code 00) should be treaty exempt. Has the IRS done something wrong here?

That depends on the nature of the Form 1042-S income. Certain scholarships and fellowships ARE tax-exempt regardless of the treaty.

>>>> That depends on the nature of the Form 1042-S income. Certain scholarships and fellowships ARE tax-exempt regardless of the treaty.

Could you please elaborate? Which kind of scholarship/fellowship are tax exempt and why?


I just asked my friend.. income code on that 1042-S (which IRS treated as non-taxable) was 15 and exemption code was 00...

The IRS has a separate IRS pub that addresses the taxability of scholarships and fellowships, so there is no way I can adequately cover that issue on this forum.

Generally, the amount of a scholarship or fellowship that exceeds the amount of tuition and fees becomes taxable income, but other costs, such as books and supplies, can be used to offset the taxable portion of the scholarship.

I earn only pension in India and the same is taxed in India. I am never employed in US nor any other source of income. As per the IRS guidelines Pensions earned in other countries is 'Unearned income'. I am dependent on my wife for the past 4 years for filing taxes in US and we file individual returns in India and she has some agricultural income much below the tax exemption limit. I also have couple of other bank accounts in which only some money is transferred from US banks to these accounts which exceeded the limit of $10K during 2012. Please clarify the following:
1. Do I have to mention my Pension earned in India as "Unearned income" and claim exemption in US joint return?
2. Is it advisable to file individual returns in US?
3. Do I have to give details of all accounts and Investments in India even though all put together?

Are you a U.S. resident for tax purposes?

If so, then, under the U.S.-India Tax Treaty, the pension is taxable in the United States. You would report it on Line 16b of Form 1040.

It MAY be advisable to file separately from your wife; I would have to examine all of your financial data to be sure.

Yes, you DO have to report the specifics of your financial data in India on Form TD-F 90-22.1 (FBAR)

If you believe that you will need professional help filing this year, this IS what I do. Please double-click on my name (Atlanta Tax Expert) above to access my profile. You will find my email address in the signature portion of the profile (scroll down to the BOTTOM of the page).

For f1student123
If you are a degree candidate and if the financial aid (includes scholarship and fellowship) is for tuition fee, other fees, books, supplies and equipment, then it is not taxable. For a degree candidate aid for boarding and travel are taxable. If you are not a degree candidate, then all the financial aid is taxable.

You must use Worksheet 1-1 in Chapter 1 of Publication 970 to figure out the taxable amount. Scholarship and fellowship grants, Your U.S. Tax Return: The U.S. Income Tax Topics 1