I am a J1 - Exchange Student from Australia, I was under the assumption that asper the treaty with US-Australia that I would be excempt from federal taxes, but federal tax's are being currently withheld from my pay.
Could you please clarify as to if I am federal tax exempt, And if I am then what is the process of to go about not being taxed for it?

The US-Australia tax treaty says:
ARTICLE 20
Students
Where a student, who is a resident of one of the Contracting States or who was a resident of that
State immediately before visiting the other Contracting State and who is temporarily present in that other
State for the purpose of his full-time education, receives payments from sources outside that other State
For the purpose of his maintenance or education, those payments shall be exempt from tax in that other
State.


That would mean you would only be exempt from paying taxes for payments received from outside the US. If you get paid from a source inside the US, you would not be exempt.

J1 students pay federal and state income tax. They are exempted from social security tax and medicare tax. You must file nonresident tax return. Your U.S. Tax Return: U.S. Tax Filing Requirements for Non-Residents

Both TaxForAliens and MukatA are correct: income earned for work WITHIN the United States are subject to both federal and state income taxes.

If you need professional help filing your 2011 tax return, email me at [email protected].