Hi,
I am a J1 Researcher (Post-doctoral fellow) from India . I have the following questions regarding Federal and state taxes.

Can I benefit from tax treaty from India and USA? I am currently paying Federal Taxes and New Jersey state tax.

I came to know that J1 is exempt from tax for the first two years. But if I continue to stay longer, will I be subjected to pay taxes for the years I was exempted?

I also have family of two dependents (my wife and a son). Can I claim taxes because they are dependent on me?

Looking forward for a reply.

Best
NS

First, you need to CONFIRM that you are in fact viewed as a researcher by your sponsoring organization. Many universities treat post-doctoral fellows as trainees or students and NOT researchers.

If you ARE a researcher, then you are exempt from taxation for twenty-four consecutive months under the U.S.-India Tax Treaty. However, if you stay BEYOND 24 months, you become liable for federal income taxes retroactively for that 24-month period.

I have had many clients who had every intention of returning to india after the 24-month period, then changed their minds when they got the dream job offer. Unfortunately, paying back taxes for a 24-month period over (usually) three separate tax years can be an extraordinarily PAINFUL process, because the IRS MUST (by law) charge interest on the unpaid taxes and often refuses to waive the 25% failure-to-pay penalty. Hence, if you believe that you may stay beyond the 24-month tax-exempt period, it is better to have the taxes withheld and file as a non-resident alien. As a trainee or student from India, you ARE allowed to claim your wife and son as dependents on the non-resident alien tax return (Form 1040NR).

If you then return to India as scheduled, you can go back and amend the original returns and claim the tax-exempt status, getting back the taxes you paid plus interest. This is a LOT less painful than paying two years worth of back taxes.

New Jersey does NOT honor the U.S.-India Tax Treaty, so you will have to have New Jersey state income taxes withheld from your pay and file a normal New Jersey return regardless of how you file on the federal level.

If you need professional help with this, email me at [email protected].

Thank you very much for your answer.

My id says Postdoctoral Fellow/ Staff and my DS2019 says Research Scholar.
Since I came to US just four weeks back, I am not sure if I will continue after 24 months. Hence I take your advice of leaving the taxes untouched.
I pay the Federal Withholding Tax but my FICA-OASDI and FICA-Medicare are not charged. The federal withholding has been fluctuating though. Going by what you say, do I have to also pay the FICA for the time I don't pay i.e do I have to pay up with interest for all the defaulted period at the end of three years?

Do NOT go by what the DS2019 says. Call the payroll or personnel (also known as Human Resources) department, request an appointment, take all of your documentation with you, and ASK for a ruling IN WRITING as to whether you are considered to be a student, trainee or researcher. In that written ruling, ask for a specific article citation from the U.S.-India Tax Treaty. You will want that written ruling to submit with the amended tax returns should you return to India in two years and want to get the taxes back.

The federal withholding depends on the amount of salary you earn and the number of allowances you claim on the Form W-4 you submit to the employer. As a married foreign national, you can claim MARRIED with, at MOST, TWO allowances.

Regardless of whether you are a student, trainiee or researcher, you ARE exempt from FICA (Social Security and Medicare) for TWO calendar years, which, for you, would be 2011 and 2012. That is a matter of U.S. tax law and is NOT dependent on the tax treaty. On 1 January 2013, you become liable for FICA taxes, so you need to make sure your employer is aware of this fact and will begin withholding FICA starting on 1 January 2013. I normally advise that my clients send this notification by email with a request that receipt be acknowledged. That way, they have a written paper trail.

Thanks once again.

I do see that the number of allowances has been taken as 1 (One) and my filing status is termed as Single. If I have to amend that to Married then there is a note saying that(if married, but legally separated, or spouse is a non resident alien, check the single box). Another option is Married, but withhold at higher Single rate... Is this fine?

If you file a non-resident alien tax return, your status as an Indian citizen allows you to claim your wife and child as dependents. For this reason, you CAN file a MARRIED and claim TWO allowances, regardless of what the Form W-4 instructions say. You will be allowed to claim three exemptions on that tax return, plus claim the SINGLE standard deduction, which, in total, would allow you to exempt the first $16,000 of your salary from income tax.

This being the case, MARRIED with two allowances will cause more than enough money to be withheld from your salary to cover your income tax liability.

"MARRIED with two allowances will cause more than enough money to be withheld from your salary"

In that case, don't you think it would be better to keep it at less withholding. As it is, the federal withholding doesn't follow a proportional curve like if its 50 for one week, then it would be 100 for two weeks.

The withholding amount is keyed for TWO allowances; he will have THREE exemptions (his own, his wife's, his child's).

Besides, you do NOT want to over-withholdi and get a refund; you want to PAY when you file your return. ANY refund is an interest-free loan to the U.S. government.

The last one if I understood you correctly, adding Married to the filing status and writing the number of allowances as 2, will lead to less amount being withheld from the monthly salary. Please correct me if I am wrong.

Your understanding is correct: MARRIED with TWO allowances results in the LEAST amount being withheld that is allowed under current IRS guidance for foreign workers.