[buddhuram]

I am a nonresident (Indian) looking for advice regarding filing my 2006 taxes. I have searched several forums but haven't found a convincing response to the following question:

During 2006 I was on F1-OPT till June 28. I started work from my employer in Wash DC on April 24. Since my OPT expired in June, I relocated to the New Delhi office of my company in order to remain in status and still continue my work, while the mothership processed my H1 visa. I worked from June 29 to December 4 out of the Delhi office and returned to the US with my H1 visa on December 5. During my time in India, my wages were being directly deposited to my US account by my employer and federal/state taxes being withheld as if I was still in DC. Consequently my W2 shows my income from April 24 till the end of the year.

In sum, I earned around 40k in total from:
Jan 1 - April 23 No job
April 24 - June 28 on F1 OPT
June 29 - December 4 worked in India for the same company
December 4 - December 31 on H1 B

So my question is: Is the income - for the five months I was in India - tax exempt? If yes, where do I show it on 1040NR?
A related question - Since the majority of the income I earned while I was in the US was while I was on my F1-OPT (April 24 - June 28) can I still claim the standard deduction for Indian students?

Kindly let me know your thoughts. Thanks so much in advance.

[AtlantaTaxExpert]

The income is NOT tax exempt, because it is U.S.-sourced. However, if it was taxed in India, you can claim a credit for those taxes using Form 1116.
Yes, you CAN claim the standard deduction.

[The Texas Tax Expert]

The income is NOT tax exempt, because it is U.S.-sourced. However, if it was taxed in India, you can claim a credit for those taxes using Form 1116.
Yes, you CAN claim the standard deduction.

I disagree. Income for services performed abroad is foreign sourced.

[Mobea]

This is straight from the IRS website

What is foreign earned income? Is it income from a foreign source or income paid by a U.S. company while living abroad?

Earned income is pay for personal services performed, such as wages, salaries, or professional fees. Foreign earned income is income you receive for services you perform in a foreign country during a period when your tax home is in a foreign country and during which time you meet either the bona fide residence test or the physical presence test. It does not matter whether earned income is paid by a U.S. employer or a foreign employer. Foreign earned income does not include the following amounts.

The previously excluded value of meals and lodging furnished for the convenience of your employer.
Pension or annuity payments including social security benefits.
Payments by the U.S. Government, or any U.S. government agency or instrumentality, to its employees.
Amounts included in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualifying annuity contract.
Recaptured unallowable moving expenses
Payments received after the end of the tax year following the tax year in which you performed the services that earned the income

[AtlantaTaxExpert]

While I will concede that the five months is probably foreign income, the IRS will consider it taxable because IF the person decide to file jointly with his spouse (assuming he is married).

If he files as a NRA, then he can exempt the income earned while in India under provisions of the India-U.S. Tax Treaty.

[The Texas Tax Expert]

ATE, I'm not quite following you here. You are correct that if he is a resident alien (or elects to be so) then he would be taxed on all income worldwide.

However, if he is a non-resident which seems to be the case, this is foreign source income and should not be subject to US tax.

[AtlantaTaxExpert]

TTE, I grant you that his U.S.-based income earned while in India is NOT subjet to U.S. taxes.

However, the IRS does not know that. All they see is one W-2 that has income from a U.S. company. So they are going to consider that income subject to U.S. taxes unless Buddhuram properly accounts for it on his tax return.

[The Texas Tax Expert]

I agree that the IRS will assume it is taxable until he indicates otherwise.

[AtlantaTaxExpert]

We actually agree?? That is an earth-shattering event! :-)