Ask Me Help Desk - Visa switch from J1 to F1. Undo claiming of tax treaty

Hi all,

I have recently switched from a J1 visa to a F1 visa. I would like to determine if and how I can claim a tax treaty. My case is the following:

I am a graduate student from germany. I entered grad school in NYC in January 2009 with a F1 visa. I had been to the US before as a research intern with two separate J1 visa between 2006 and 2008 (see below).

During my "J1-visits", I claimed the US-German tax treaty.
I was able to claim it for the calendar years 2006 and 2007. In 2008, I began paying taxes.

I was told by the University HR that I cannot claim the 5 year Tax treaty under my current F1 status if I already claimed a treaty under J1 status before. Apparently, a "back-to-back" rule applies here. I could not find any information about that.
I was told also, that the only way to get around this was to retract my claiming of the treaty for 2006/07 retroactively and pay taxes for those years.

This seems to be the way to go becaues I did not earn anything in 06 and for 07 my income was barely above personal exemption.

Does anyone have advice on this? How can I undo my claiming of the treaty?

Past and current stays in the US

June 2006-October 2006
visa: J1
Income: $0

no taxes, but day-count for 2 year treaty already active

june 2007 - june 2008
visa: another J1
Income 2007: $4433 (compensation for researching)

no taxes, treaty claimed

Income 2008: $5572 (compensation for researching)

Federal Tax: $465
NY state Tax: $84
City (NY): $66
(treaty could only be claimed for 2 calendar years apparently)

January 2009-2013
visa: F1

On J1 you are exempt for residency for two years. You MUST file non-resident tax return. In the third year (that is 2008) you will file resident tax return.

Under the provisions of the tax treaty, your J-1 tax exemption was valid for two years (2006 and 2007). You then paid taxes as a non-resident alien for 2008, claiming NO treaty exemption.

Now, regardless of whether you retract the tax exemption or not, you will be exempt from the Substantial Presence Test for ONLY 2009 and 2010, because the J-1 visa time counts against the five-year F-1 time. That is my reading of the rules, which only slightly differs from the HR department representative.

BOTTOM LINE: Make no changes to your previous years' returns. File as a non-resident alien student and claim the $5,000 treaty exemption authorized under Article 20(4) of the U.S.-Germany Tax Treaty for 2009 and 2010.

Quote:

Originally Posted by AtlantaTaxExpert

Under the provisions of the tax treaty, your J-1 tax exemption was valid for two years (2006 and 2007). You then paid taxes as a non-resident alien for 2008, claiming NO treaty exemption.

Now, regardless of whether you retract the tax exemption or not, you will be exempt from the Substantial Presence Test for ONLY 2009 and 2010, because the J-1 visa time counts against the five-year F-1 time. That is my reading of the rules, which only slightly differs from the HR department representative.

BOTTOM LINE: Make no changes to your previous years' returns. File as a non-resident alien student and claim the $5,000 treaty exemption authorized under Article 20(4) of the U.S.-Germany Tax Treaty for 2009 and 2010.

The situation is actually a bit different regarding my current status: Since 2009, I am being paid a stipend and therefore article 20(3) applies. Under this article, there is no maximum presence and no maximum payment.

But the University representative tells me that I cannot claim any treaty because of a Back-To-Back clause.
In my reading, this clause only exists for article 20(1) which I used earlier while I was still a J-1. The University tells me that this rule also applies when I switch FROM 20(1) TO 20(3). They say I needed to re-establish residency but I see no basis for this.
Am I missing something?

Any hints are greatly appreciated

Check Form 8843, part III for students. There is a question
"Were you present in the United States as a teacher, trainee, or student for any part of more than 5 calendar years?"
In your case the answer is No, so you are exempt individual and can get treaty deduction.

Quote:

Originally Posted by MukatA

Check Form 8843, part III for students. There is a question
"Were you present in the United States as a teacher, trainee, or student for any part of more than 5 calendar years?"
In your case the answer is No, so you are exempt individual and can get treaty deduction.

Thank you very much for the hint but I think the problem my be something else: The University doubts that I can be considered a resident of germany for treaty purposes given my visa/treaty history. They say it takes 365 days to re-establish residency. Any ideas where to get an official reference on that?

I have not been able to find a reference per se, but most of the technical explanations of tax treatries all cite a standard one-year residency period being required to re-establish residency back in your home country.

Quote:

Originally Posted by AtlantaTaxExpert

I have not been able to find a reference per se, but most of the technical explanations of tax treatries all cite a standard one-year residency period being required to re-establish residency back in your home country.

Thanks for checking! Can you name a specific technical explanation? I did not find such a statement in the technical explanation of the German tax treaty.

I wonder though: the term 're-establish' implies in my understanding that I have to have lost residency in the first place. I did not loose german tax residency in 2008 because I maintained closer connection to Germany and stayed in the US for less than 180 days. 2008 was my third year in the US, therefore I did not claim the treaty anymore but I was still considered a german tax resident. For 2008 I filed 1040NR-EZ as a non resident which was accepted and I got some taxes back. So given that I apparently did not loose german tax residency, do I still have to re-establish german tax residency?

You CAN argue this point (maintaining closer connection and this NOT have to re-establish residency) with the IRS by submitting Form 8833 with your tax return. If they accept the argument, then you should okay.