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US-China Tax Treaty

I came to the United States in Aug. 2007 to attend undergraduate college under F1 and graduated in May 2011. After using OPT for 3 months, I changed my visa to H1B at Oct. 1st, 2011. Because I was only under H1B for three months, I filed my federal tax return as a Non-resident alien last year (2011). In Fall 2012, I will convert back to F1 and start graduate school. I am curious to find out whether I can claim tax treaty benefits on my fellowships and scholarships for my graduate studies.

I understand that after staying in the US for 5 years, I will have become a resident alien for tax purpose regardless of my H1B visa status. However, it has come to my understanding that many of my Chinese friends who have stayed in the US for more than 5 years can still claim the tax treaty benefits because of "some exceptions to the saving clause apply to all resident aliens (for example, under the U.S.-People's Republic of China treaty)."

This is the part I am not sure if it is applicable to me after I started to work under H-1. Can I still claim the benefits if I convert back to F1 inside the US? If not, would it help if I go back to China and re-enter as F1 student before school starts? Also, I am curious whether it will make a difference if I terminate my H-1 status within certain days. For example, if I terminate before the end of May and go back to China, I will not pass the "substantial test" for either 2011 or 2012.

Thanks a lot in advance for your answer!

If you STAY in the United States and convert BACK to F-1 from H-1 status, In my opinion, you CANNOT claim the $5,000 Chinese Treaty Exemption. The Exception to the Savings Clause does NOT apply if you change visa status from a student visa to a work visa.

However, if you return to China and "re-establish residency", then return under a second F-1 visa, an argument could be made for you to be able to claim the treaty exemption, even though you would be filing as a resident. You would need to submit Form 8833 each year to explain the circumstances and reasoning behind claiming the treaty exemption. The IRS may or may NOT accept the argument, but it would be worth the effort to get the extra $5,000 tax exemption. The worst that would happen is they say NO, in which case you STILL get to claim the $5,800 standard deduction.

The problem in this process is the "re-establish residency" requirement. That typically requires you spend AT LEAST one year back in your home country, which means you would need to return before August of 2011.

Hi,

Thanks a lot for your answer.

Does the same argument hold for the fellowships and scholarships? I am less concerned about the $5000 tax exemption than being taxed on my fellowships and scholarships from graduate school, which will be my main source of income for the next 5 years.

Thanks!

Regardless of your visa status, fellowships and scholarships are normally NOT taxable income if they cover only the costs of the tuition and fees.

They become taxable income if they exceed the cost of tuition and fees and the money is used for other living expenses, like rent and food.

My undergraduate financial aids (the amount that is more than my tuition and fees, which I used to pay room and board) were not taxed because of Article 20(b) in the US-China tax treaty:

(b) grants or awards from a government, scientific, educational or other tax-exempt organization;

I am just wondering if it will still be the caes for my graduate fellowships.

Thanks!

Quote:

Originally Posted by AtlantaTaxExpert

Regardless of your visa status, fellowships and scholarships are normally NOT taxable income if they cover only the costs of the tuition and fees.

they become taxable income if they exceed the cost of tuition and fees and the money is used for other living expenses, like rent and food.

General rule: If it is a schoarship or grant, it is tax-free.

If it is a fellowship, it MAY be taxable if it is compensation for services rende.

Thank you very much for your help!

Quote:

Originally Posted by AtlantaTaxExpert

General rule: If it is a schoarship or grant, it is tax-free.

If it is a fellowship, it MAY be taxable if it is compensation for services renedered.

Glad to help!