[traianus]

Hello,
I have a question related to the non-resident alien/resident alien problems. More in detail, I have a question about the exemption under international agreements between USA and my country Italy.

Briefely, I describe my situation.
I am an Italian citizien. On the 3rd of September 2002 I arrived in the USA under J-1 VISA (after March 2005 I started the H1B VISA). I was here as a teacher/researcher. For the ENTIRE 2002 I was supported by Italy. In the year 2003 I was supported by Italy as well until October 2003. In November 2003 I started working as a research associate at the University. Therefore, I had a US income source only for the months of November and December 2003. The University asked me to fill out forms W4 and 8233, including the Attachment to Form 8233 (Article 20-Teachers and Researchers). Even though I was exempt from paying taxes in 2003, I DID pay all taxes in 2003.

In 2004, I claimed that I was exempt and the University returned me some money (see point 2 below). I believed that this refund was related to the year 2003. Therefore, I did not file any tax return for the year 2003.
I filled out forms W9 and 8233 in the year 2004.

This year (2005), I did some "investigations" about what the University was doing on my taxes. Basically, I found out the following information:

1) I paid all taxes in 2003 (Social Security, Medicare and Federal) but I was 100% exempt under article 20 of the treaty USA-Italy.

2) The refund I was talking about above was related to the federal taxes for the first two months of 2004. Therefore, from a practical point of view, I did not pay any federal tax in the year 2004 until August 2004. I concluded that I was considered exempt.

3) The University DID NOT consider me exempt from Social Security and Medicare taxes in the same period (January-August 2004).

I spoke with my employer about all the issues. The University is going to refund me the Social Security and Medicare taxes for ONLY the year 2003. For the Federal taxes of the year 2003 I will ask the IRS for the full refund using the form 1040NR-EZ. The issue is about the year 2004. The University is NOT going to refund any Social Security or Medicare taxes for 2004. I had 2 years exemption and so I should not pay anything. However, in 2004 I became a resident alien and AFTER that date (which should be on August 2004) I was supposed to pay those taxes. Please tell me what I have to do. Before this discovery, I filled out the 1040EZ form for the year 2004. It was returned to me by IRS because I forgot to attach the form W2. After all these findings, I am going to attach form 1040X and form 1040NR-EZ for the year 2004 (in these forms I have to write the portions of income for which I was exempt and the portions for which I was not). Then I am going to file form 1040NR-EZ for the year 2003 in order to have the federal tax back and, finally, I am going to file form 843 in order to claim the social security and medicare taxes held by error in the period of Juanary-August 2004.
Is everything I said right?

I'm exempt from paying taxes (social security, medicare and federal) for 2 years (my Country is Italy). I arrived in the US on September 2002. Does my exemption end in August 2004 (2 years after my arrival date)? For the year 2004, am I exempt only from paying Federal taxes or the exemption is total (100% tax free)? If yes, I'm supposed to start paying taxes in September 2004. Right?

Please answer these questions as soon as possible.

One last question: in my case, I was considered non-resident alien until August 2004. Is it right?Thank you again,
Traianus

[AtlantaTaxExpert]

Traianus:

Filing Form 1040NR-EZ for 2003 to claim the withheld income taxes is the correct method. Be sure to properly cite the U.S.-Italian Income Tax Treaty.

If your Form 1040EZ for 2004 was returned, then you never filed a 2004 tax return. For this reason, you do not have to file Form 1040X. Just file Form 1040NR or Form 1040NR-EZ to cover the period of 3 Sep 2004 to 31 Dec 2004; mail it to the Philadelphia IRS Center. That is when your two-year exemption ended; prior to 3 Sep 2004, your exemption applies to all taxes.

File Form 843 to claim the Social Security and Medicare taxes for the period of 1 Jan to 2 Sep 2004. You need to attach a letter from the university explaining why they will not refund these taxes. There are additional forms required, as specified on page 45 of IRS Pub 519. You can download that pub from www.irs.gov.

Up until 3 Sep 2004, you were considered an "exempt" individual, which means until that date you did not accrue any time for the Substantial Presence Test. For that reason, you are a non-resident alien for the portion of 2004 to which your tax exemption does not apply. However, for 2005, you will meet the Substantial Presence Test and should file Form 1040/1040A/1040EZ as a "resident alien".

[traianus]

Thank you AtlantaTaxExpert!
I have some questions related to your answer and related to more information I collected on the subject.

In the international agreement between Italy and USA (http://www.irs.gov/businesses/intern...=96739,00.html), I found the following statement (valid for my case, article 20):

It is possible that an individual who meets the qualifications of this Article, including the requirement that the visit be “temporary” may remain in the other State longer than two years, in which case the exemption applies for the first two years of the visit.

Therefore I am 100% exempt until August 2004 included. This agrees with what you said. Now back to the non-resident alien issue.

So, until September 3 of the year 2004, I was "exempt" in the "tax" meaning. I think that in the period from September 2002 until September 2004 I was not an "exempt individual" in the computation of the days of presence. I explain what I mean. On page 6 of publication 519 you can read in the section related to teachers and trainees:

"You will not be considered an exempt individual as a teacher or trainee if you were exempt as a teacher, trainee, or student for any part of 2 of the 6 preceding calendar year".

Considering this, it appears that I was exempt in the computations of the days in the calendar years 2002 and 2003. However, after 183 days in 2004 I became resident alien (which means I am a resident alien after June 2004). Is it right?

This is important. In fact, if I am considered non-resident alien I do not have to pay any social security and medicare (but I have to pay the federal taxes) even after the exemption period ended. Is it right?

Thank you again!
Traianus

[AtlantaTaxExpert]

Traianus:

Initially, it was my view that you had the option to become a resident alien in 2004, and that you must become a resident alien in 2005.

Further, your citation about the teacher/trainee exemption for the previous two years would indicate that you must count all of the days in 2004 for the Substantial Presence Test.

This being the case, you MUST file as a resident alien for 2004. However, based on what you have provided, In my opinion, you are exempt from all taxes until September 2004, based on Article 20 of the treaty.

[traianus]

Thank you for your answer. Here I post what IRS answered. I ask your opinion about it.

For tax year 2004, the return you file will be determined by whether you are a resident or nonresident for income tax purposes. You are a resident if you meet either the green card test or the substantial presence test. Publication 519, U.S. Tax Guide for Aliens, pages 4-7, discusses being a resident for income tax purposes under the green card test and the substantial presence test (SPT).

The green card test is being a lawful permanent resident of the United States at any time during the calendar year. You are a lawful permanent resident of the United States at any time if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant.

Under the SPT, you will be considered a resident for tax purposes as long as you are not exempt from the SPT if you are physically present in the U.S. at least 1) 31 days of the current year, and 2) 183 days during the three-year period that includes all the days present in the current year, 1/3 of the days present in the first preceding year, and 1/6 of the days in the second preceding year. However, there are exceptions for counting the days of presence. One of the exceptions is that you do not count as days of presence in the United States for the SPT if you are an exempt individual. An exempt individual is anyone in the following categories:

1. An individual temporarily present in the United States as a foreign government-
related individual.
2. A teacher or trainee temporarily present in the United States under a "J" or "Q"
visa, who substantially complies with the requirements of the visa.
3. A student temporarily present in the United States under an "F", "J", "M", or "Q"
visa, who substantially complies with the requirements of the visa.
4. A professional athlete temporarily in the United States to compete in a charitable
sports event.

A student under an "F", "J", "M", or "Q" visa is exempt from counting the days of presence under the SPT as long as he or she has not been exempt as a teacher, trainee, or student for any part of five calendar years. The five calendar years need not be consecutive and once a cumulative total of five calendar years is reached during the student's lifetime after 1984, he or she may not be an exempt individual as a student again during his or her lifetime.

A teacher, researcher, scholar, or trainee under a J or Q visa is generally exempt from counting the days of presence under the SPT as long as he or she has not been exempt as a teacher, trainee, or student for any part of two of the six preceding calendar years.

You also do not count the days of presence for days you commute from a residence in Canada or Mexico if you regularly commute from Canada or Mexico, days you are in the United States less than 24 hours when you are in transit between two places outside the United States, days in the United States as a crew member of a foreign vessel, or days you are unable to leave the United States because of a medical condition that develops while you are in the United States. Even if you meet the substantial presence test, you can still be treated as a nonresident if you are present in the United States for less than 183 days during the year, maintain a tax home in a foreign country during the year, and have a closer connection during the year to one foreign country in which you have a tax home than to the United States.

In your situation, you are a resident alien for tax year 2004. Under the substantial presence test, you are exempt from this test for years 2002 and 2003, and in 2004 you begin counting the days. Your 183rd day would have been July 1, 2004 and you would be both a nonresident alien and a resident alien during the same tax year. But if you meet the substantial presence test for a calendar year, then your residency starting date is generally the first day you are physically present in the United States during that calendar year (Publication 519, page 8). With the assumption that you were in the United States on January 1, 2004 and generally remained in the United States for the entire year, then you are considered to be a resident alien for all of 2004. As a resident alien, you would file Form 1040. You would have to include worldwide income on your Form 1040 as a resident.

Generally you would not be able to utilize the benefits of a tax treaty as a resident alien. Article 1 of the United States - Italy Income Tax Treaty contains the saving clause of the treaty, which normally acts to nullify the tax treaty's benefits once a resident of Italy has become a resident of the United States. However, one of the exceptions to the saving clause specified by Article 1 is Article 20 on Professors and Teachers. This means that even though you have become a resident alien under the substantial presence test, you may still claim the benefit of Article 20 of the United States - Italy Income Tax Treaty. This is an election made by you on your tax return. You would file Form 1040 as a Treaty-Based Return Position and attach Form 8833, Treaty-Based Return Position Disclosure, to your return.

If you want to utilize the benefit of Article 20 of the treaty, you need to show all of your wages earned in 2004 on line 7 of Form 1040. Enter any other income you may have on the appropriate lines of Form 1040 such as bank interest, dividends, sale of stock (capital gains), etc. On line 21 on the dotted line, put "See attached Form 8833" and on the amount line enter the amount of your wages excluded by the treaty (January 1 - September 2, 2004) as a negative number. On Form 8833, Line 5, you would explain your history of your visit and how the treaty applies to your situation.

As for the social security and Medicare taxes, you are exempt from these taxes under Internal Revenue Code (IRC) 3121(b)(19) while you are a nonresident alien under the residency rules of IRC 7701(b). Because you are exempt from the substantial presence test for two years under J-1 status as a teacher researcher and a resident for income tax purposes in your third year (2004), then your wages are subject to the withholding of social security and Medicare taxes (Publication 519, pages 45 - 46). The University is correct in refunding these taxes for year 2003 and not refunding them for year 2004. The income tax treaty with Italy and the United States only exempts income tax withholding and does not apply to social security and Medicare tax withholding.

IN CONCLUSION, you will need to file Form 1040NR-EZ along with Form 8843 for tax year 2003 to obtain a refund of the income tax withheld. For tax year 2004, if you haven't returned the Form 1040EZ that was sent back to you because of a missing Form W-2, which means that no return was processed for you for 2004, then you need to file an original Form 1040 along with Form 8833 to file a treaty-based return position disclosure. If your 2004 was processed, then you need to file Form 1040X and attach a Form 1040 and Form 8833 to the amended return to be used as worksheets for Form 1040X. You are a nonresident alien for all of 2002 and 2003 and a resident alien for all of 2004, based on the information you provided. Again, your wages are exempt from withholding and taxation because of Article 20 of the tax treaty with Italy and the United States for a period of two years from your date of arrival - September 3, 2002 through September 2, 2004. You are exempt from social securit
y!
and Medicare tax withholding for 2002 and 2003, your years as a nonresident alien, but you are liable for these taxes in the year you become a resident alien, 2004, with your residency starting date of January 1, 2004. You should not be filing Form 843 to obtain a refund of the social security and Medicare taxes for 2004.

Publication 519 along with forms and related instructions referenced in the above response are available at www.irs.gov under Forms and Publications. You can also order these items by calling toll-free 1-800-829-3676. Please allow 10 business days for delivery.

I hope this information has been helpful. If we have misinterpreted your information, you have additional questions, or you need further clarification, please contact us again.

[AtlantaTaxExpert]

Traianus:

While I do not necessarily agree with the IRS interpretation regarding the Social Security and Medicare taxes, that point is rather moot!

The interpretation given to you by the IRS covers all aspects of your case in detail and answers all of your questions. It also provides details as to how to file that agree with my recommendations save for the Social Security and Medicare taxes (which the IRS thinks you are liable for). Further, it provides a precise step-by-step procedure for filing your 2004 tax return.

BOTTOM LINE: The IRS has given you their interpretation as to how you should file. I can find no real fault in their logic, so I would recommend you follow their guidance.

[traianus]

Thank you again!

I have a little easy question. Why should I file the form 8833 for the year 2004? In 2004 the University did not charge the FEDERAL taxes (after a little war) until September (when the two years exemption expired). Therefore, I should file the tax return for the rest of the money (that also appear in W2 form). Is it right?

If I understood correctly, I do not have hope to have my social security taxes and medicare refunded (for the year 2004). Is it right? If I file the form 843, do I have hope to obtain something?
Thank you

[AtlantaTaxExpert]

Traianus:

You are filing Form 8833 and attaching it to your Form 1040 to claim the benefit of Article 20 of the treay, as noted below:

"If you want to utilize the benefit of Article 20 of the treaty, you need to show all of your wages earned in 2004 on line 7 of Form 1040. Enter any other income you may have on the appropriate lines of Form 1040 such as bank interest, dividends, sale of stock (capital gains), etc. On line 21 on the dotted line, put "See attached Form 8833" and on the amount line enter the amount of your wages excluded by the treaty (January 1 - September 2, 2004) as a negative number. On Form 8833, Line 5, you would explain your history of your visit and how the treaty applies to your situation."

Without the Form 8833, you could not explain why you are excluding the amount of your wages from January 1 - September 2, 2004 as noted by the negative number on Line 21 of Form 1040.

Do not file Form 843. The IRS made it clear that they do not consider you exempt from Social Security and Medicare taxes. Given this clear guidance, filing for a refund now would constitute tax fraud.

[traianus]

Thank you!
I posted other questions on the IRS web site and if something is interesting, I will post it here.
Traianus

[lcer75]

Hi,
I'd like to know if article 20 of Italy-USA treaty can be applied to my case too.
I am an Italian citizen, arrived last September from my country to the US on a J-1 visa, expiring on Aug 31 2008. I'm here for a pre-doc fellowship at SAO, which is part of the Smithsonian Institution and my appointment is for 1 year but renewable twice. Anyway I will renew my fellowship only once: two years in total.
Though enrolled at an Italian university for a PhD, here in USA I'm not enrolled at any university course and my fellowship is only for resarch purposes.
So my question is: do I have to be considered under article 20 or 21?

Thank you

[AtlantaTaxExpert]

lcer75:

In my opinion, you qualify for Article 20 of the U.S.-Italy Tax Treaty and should be exempt from any taxes on income earned while on your fellowship. If you make SAO aware of this fact, they will not withhold any taxes.

It is possible, however, that Italian taxes may be due. This is not my area of expertise, so I suggest you check with someone with expertise in Italian tax law.

[traianus]

This post is for the record and because I like to tell you how the story ENDED.

About the 2003 I had ALL my taxes (social security + federal) returned. About the 2004 the approach I followed was correct: exemption federal taxes until the experation of the two years exemption, but I paid the social security taxes. I also had a tax return because I paid more than I should have. Hopefully my experience will help other people in my situation. Good luck!

[lcer75]

Thanks Atlantataxexpert,
I have asked SAO resonsible to verify my situation but their first response has been that I don't qualify because article 20 is only for teachers/professors and I'm just a researcher. Then are all researchers excluded in that article?

[traianus]

Very often researcher are considered as well. You should read all the details in the rules.

[AtlantaTaxExpert]

Agree with Traianus. Researchers are often considered teachers/professors when they conduct their research with academic institutions such as universities.

Just my humble opinion.

[traianus]

I have now a changed situation.

I bought a house in Italy and I pay mortgage there. I also pay annual properties taxes. The house is considered "first home" in Italy under the tax law. My parents are living there. I pay the mortgage but I live in The USA where I rent a place. I do not have other properties in The USA.
I also have a very old and in bad conditions (you can not live there) a small house in a small town in Italy. It was my grandfather's and now it is mine. I pay the properties taxes in Italy (the city in which the house is located asks money for the public services).

Now the question: should I declare the houses in the TAX in The USA even if they DO NOT produce income (actually the produce expenses).

Other question: if in the future I like to buy a property in The USA, will it be considered first home?

Thank you!!

[AtlantaTaxExpert]

You CAN claim the interest paid on up to TWO properties as an ITEMIZED expense on Schedule A if you are filing as a resident alien. It does not matter where the property is located. If you are paying this interest to a foreign bank, you must identify the recipient of the money on the Schedule A.

The real estate taxes on these properties are also deductible as an itemized deduction on Schedule A, but, again, only if you are filing as a resident alien.

If you claim these properties, you will have problems claiming deductions for any U.S.- based house.

[traianus]

Thank you! So, you suggest to no claim the properties in Italy and then do it when I buy a property in The US?
I am resident alien (H1B VISA and hopefully Green card soon). Which form should I use? I used in the past 1040EZ

[AtlantaTaxExpert]

No, not necessarily. When you get a U.S.-based property, you will have to STOP claiming the second house in your home country.

You will need to file Form 1040.

[traianus]

Thank you. Should I have a proof of the interests paid such as the bank statements (in Italian)? Should I attach these proof in my form 1040? I do not have idea how to do it. Please help!