[Dav1984]

Dear Tax experts ;)
I have a tricky question concerning tax treaty exemption. I'm an Italian Citizen working in US with a J-1 visa. My wife has my same J-1 status as she also works at the University. According to ITALY-US tax treaty, under article 20 we are exempted to taxation in the US for the first two years, and we are considered for these two years non resident aliens. We are planning to buy a house here in the US, but I want to know if this could affect our status and the tax treaty. The most important question is if we could be still exempted from STATE and FED taxes and which should our fiscal status with respect to local taxes related to the property.
There is no such explanation in the treaty but just a general principle where it is stated that to be effective the alien must have a strong connection with the home country... I don't know if house buying is considered a change in this will or just and investment.
We just scheduled to see a real good property today, so any fast advice will be extremely helpful!

Thanks

[AtlantaTaxExpert]

In my opinion, you are free to buy a house while you are under the J-1 visa, but you will NOT be able to deduct the mortgage interest and real estate taxes that you pay while under the tax exemption afforded to you under the J-1 visa.

Once that two-year period is over, you become resident aliens, and THEN you can deduct the mortgage interest and real estate taxes.

[Dav1984]

Thanks for the quick reply.
Linked to your observation I cannot deduct anything since I do not have a taxable income in the US ;)

[AtlantaTaxExpert]

That is correct, but even if you HAD taxable income, non-resident aliens who file Form 1040NR or 1040NR-EZ are NOT permitted to deduct the real estate taxes or the mortgage interest.

[Dav1984]

OK this is really useful to know!! So in any case I have to pay my real estate taxes in full!

Just a last doubt... my wife has a 5 years J1 and she has to apply for tax treaty benefits. Do you think that a 5 years J1 could affect the eligibility for the tax treaty for the first two years?
I have a 1 year J1 so for me there is no problem!

Thanks

[AtlantaTaxExpert]

If your wife is on a FIVE-year J-1 visa, then she is a STUDENT.

Students are NOT tax-exempt from federal and state income taxes on income earned while she is IN the United States. Her exemption is only for FICA (Social Security and Medicare) taxes.

[Dav1984]

But in her visa is written research scholar and she is a post-doctoral fellow... how is this possible?

[AtlantaTaxExpert]

Not all post-doctoral fellows are considered to be researchers. The LENGTH of the J-1 visa dictates her status as a student.

If she was a researcher, the maximum length of her visa could be only THREE years.

Suggest she specifically query the university to find out whether THEY consider her to be a researcher/teacher/scholar or a student. MY bet is the answer will be STUDENT!

[Dav1984]

I have to investigate about this issue, for sure they did some mistake during the appointment process... Thank you very much, this was extremely helpful!

[Dav1984]

I found this on my wife sponsor international office:
Harvard International Office - J Scholar Visa
It states that "J-1 visa holders in the Research Scholar or Professor category may remain in the United States for up to five years on the J-1 visa. "
Am I missing something?

[AtlantaTaxExpert]

The key words are "for up to"; it is driven by the tax treaty.

What is your wife's home country?

[Dav1984]

We are both italians!

[AtlantaTaxExpert]

Here is the extract from the U.S.-Italy Tax Treaty; note the two-year time restriction in RED.

ARTICLE 20
Professors and Teachers
1. A professor or teacher who makes a temporary visit to a Contracting State for a period that is not expected to exceed two years for the purpose of teaching or conducting research at a university, college, school, or other recognized educational institution, or at a medical facility primarily funded from governmental sources, and who is, or immediately before such visit was, a resident of the other Contracting State shall, for a period not exceeding two years, be exempt from tax in the first-mentioned Contracting State in respect of remuneration
From such teaching or research.

2. This Article shall not apply to income from research if such research is undertaken not in the general interest but primarily for the private benefit of a specific person or persons.

[Dav1984]

I saw that part of the treaty. If I properly understood from my readings, the rationale of the treaty is to grant tax benefits to person that are not planning to live permanently in the USA (in case of Italy maximum 2 years). So my question is, if in a J-1 visa it is stated that a person has an appointment for 5 years, could this affect the overall eligibility for exemption for the first two years?

[AtlantaTaxExpert]

The tax exemption expires after two years. The two-year period starts on arrival, and expires on the 2nd year anniversary date, 24 months after the arrival date. Fortunately, there is no retroactive tax provision if she stays BEYOND the two-year exemption period.

Given these facts, your wife can stand exemption for the 24-month period from her date of arrival, then start paying taxes effective the day AFTER the 2nd year anniversary.

For FICA (Social Security and Medicare) taxes, she is exempt for two CALENDAR years, which means she gets what's left of the year for the date she arrived, then one full year after that. On 1 January of the THIRD calendar year, she becomes liable for FICA taxes. Even if she still has income tax exemption time left. This is a matter of U.S. tax law; there is NO treaty provisions which cover the FICA taxes.

In the year she loses her tax exemption, she could file jointly with you and you BOTH choose to be treated as resident aliens, while retaining her exempt status for the part of the year. She would have to submit Form 8833 to explain the treaty provisions and explain why she is tax-exempt for part of the year.

You MAY want to consider getting professional tax help in that third year.

[Dav1984]

Ok thank you very much!
I'll take your mail to contact you as soon as we will change status

[AtlantaTaxExpert]

I will be waiting.