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rustyryan · Mar 10, 2008, 07:06 AM

Hi,

I'm from China. I worked under OPT from Jan 1 to Sep 30, 2007. I came to US in Aug 2001. Since I lived in US for more than 5 years, I suppose that I should be considered as resident for tax purpose. Since I am from China and worked under OPT for nine months in 2007, I suppose I am eligible for the $5000 exemption ( tax treaty article 20c). Am I right?

What forms should I use for my tax return? Where in the form can I claim the $5000 exemption?

Thank you very much.

Best,
Rusty

AtlantaTaxExpert · Apr 28, 2008, 12:11 PM

Yes, you are eligible for the $5,000 China treaty exemption.

You will file Form 1040 and claim the exemptio as a NEGATIVE number on Line #21.

Further, you can continue to claim the $5,000 treaty exemption for the duration of your stay in the U.S. as long as you do not get a green card.

wuzixin · Mar 16, 2009, 10:52 AM

Originally Posted by AtlantaTaxExpert

Further, you can continue to claim the $5,000 treaty exemption for the duration of your stay in the U.S. as long as you do not get a green card.

Do you mean we (Chinese) can claim the $5,000 treaty exemption even for the wage from H1B (not OPT)? Thanks.

AtlantaTaxExpert · May 7, 2009, 11:54 AM

Yes, that is exactly what I mean, provided you were in exempt status (J-1 or F-1), then converted to H-1B status.

If yo came to the U.S. on a H-1B visa to begin with, then you CANNOT claim the $5,000 treaty exemption.

wuzixin · May 7, 2009, 12:12 PM

Woo, that's cool! I guess lots of former students don't know about that.

Originally Posted by AtlantaTaxExpert

Yes, that is exactly what I mean, provided you were in exempt status (J-1 or F-1), then converted to H-1B status.

If yo came to the U.S. on a H-1B visa to begin with, then you CANNOT claim the $5,000 treaty exemption.

AtlantaTaxExpert · May 7, 2009, 12:50 PM

Which is why they should use a tax professional who is knowledgeable in international tax issues! :-)

IntlTax · May 7, 2009, 02:38 PM

ATE, this sounds like a somewhat aggressive position. The Technical Explanation to the treaty discusses the time that this is allowed:

These exemptions may be claimed only for the period reasonably necessary to complete the education or training. In some cases, the course of study or training may last less than year. For most undergraduate college or university degrees the appropriate period will be four years. For some advanced degrees, such as in medicine, the required period may be longer, e.g. seven years.

It sounds to me like the treaty was considering students and trainees. Do you have some authority to point to?

AtlantaTaxExpert · May 8, 2009, 11:51 AM

IntlTax:

I grant you that it IS an aggressive position.

The fact that the use of the $5,000 China treaty exemption is effectively open-ended is mentioned in IRS Pub 519, page 52. I have also read the Savings Clause of the U.S-China Treaty which in my opinion allows this position.

Further, I have presented this position a number of times using Form 8833 when claiming the $5,000 treaty exemption for H-1B who have converted from F-1 and have had the IRS uphold the position.

IntlTax · May 8, 2009, 12:11 PM

After looking at it a second time, I am more convinced that the position is contrary to the treaty. If you are not a student, a business apprentice, or a trainee, you do not fall under Article 20 of the treaty. Therefore, the fact that Article 20 is excepted from the savings clause would be irrelevant.

In fact, the treaty specifically provides that the exemption is only for the time "reasonably necessary to complete the education or training."

The fact that you have filed tax returns asserting this position and have not been challenged is not relevant to the validity of taking the position. The IRS audits less than 5% of the tax returns and even if audited agents often miss issues. This is no justification for taking a position on a tax return contrary to the treaty.

The Texas Tax Expert · May 8, 2009, 12:37 PM

ATE - your position is completely incorrect. You may not access article 20 of the treaty unless you are a student, trainee etc. A student who becomes resident under the SPT and yet still qualifies as a student per article 20, is shielded by virtue of the savings clause.

Someone who ceases to be a student and becomes a resident under SPT is not able to access article 20.

AtlantaTaxExpert · May 8, 2009, 12:51 PM

I need to concede this point to IntlTax.

My initial reading of IRS Pub 519 was flawed, in that IRS Pub 519 allows continued claiming of the $5,000 exemption if the Chinese student/scholar/researcher exceeds the normal 2-year or 5-year time limit and becomes a resident for tax purposes. A more careful reading of page 52 of IRS Pub 519 reveals that extending the timeframe applies ONLY IF the resident in question is still under his/her original visa (F-1 or J-1).

Further, a comprehensive review of the tax treaty and the technical explnataion does NOT support claiming the $5,000 treaty exemption once the Chinese resident converts to a H-1 or H-1B visa, which is a work visa. Once the F-1/J-1 visa holder converts to an H-1 visa, he/she may, In my opinion, claim the exemption if the bulk of the year was spent under the F-1/J-1 visa. Otherwise, they lose the treaty exemption, and defnitely lose the treaty exemption in successive years under the H-1/H-1B visa.

I will be disappointing several of my clients in the next few months, unfortunately.

Thanks for the correction, IntlTax.

TTE, I was drafting this post when your post came up.

The Texas Tax Expert · May 8, 2009, 01:07 PM

I mostly agree. The point is not the visa status. The point is whether they are a student/trainee. If they qualify as a student/trainee then they will be entitled to the benefit.

Five Rings · May 8, 2009, 02:24 PM

Do we know that the subject is no longer a student?

If not, there is no treaty benefit under Art. 20.

The Texas Tax Expert · May 9, 2009, 06:31 AM

Originally Posted by Five Rings

Do we know that the subject is no longer a student?

If not, there is no treaty benefit under Art. 20.

I don't think anyone is questioning the situation in the original post. OPT is a student related employment so he appears to qualify under the treaty.

The issue arose from ATE's claim that the treaty extended to all Chinese citizens for all time in the US. He has now rescinded that claim.