Income Tax Treaties

Certain types of U.S.-source income paid to nonimmigrants may be exempt from tax under the terms of income tax treaties between the U.S. and the recipient’s country of tax residence.  (Not all countries have a tax treaty with the U.S.)  To claim exemption from tax withholding at the time the payment is made, certain forms must be filed with, and accepted by, the Tax Coordinator in advance of the payment being made.   Eligibility for tax treaty benefits depends on several factors, the main one being the individual’s country of tax residence.  This is not necessarily an individual’s country of citizenship.  If a citizen of France has been living and working in a third country (the United Kingdom, for example) for two years prior to coming to the U.S. as a J-1 researcher, he is not necessarily eligible for the benefits of the U.S./France tax treaty.  In all likelihood, his tax residence has shifted to the United Kingdom, and that would be the treaty whose benefits he might be eligible for.

The individual’s primary purpose for entering the U.S., and the type of payment being made, are additional factors used in determining an individual’s eligibility for tax treaty benefits.  An individual who enters the U.S. in F-2 status, then changes status to F-1 after one year is NOT eligible for tax treaty benefits under the student article of a tax treaty.  This is because student articles of tax treaties require that an individual must have come to the U.S. for the primary purpose of being a student.  An individual entering the U.S. in F-2 status is doing so primarily to accompany their spouse or parent.  Changing to F-1 status after more than 60 days in F-2 status will not change the original primary purpose.

Tax treaty benefits vary depending on the type of income being paid, as well as the individual’s primary purpose for being in the U.S.  Individuals in the U.S. in student status will generally be able to exempt $2,000, $3,000 or $5,000 of their compensation income (i.e. assistantship wages) from U.S. tax, while they can generally exempt all of their non-compensatory scholarship/fellowship, without dollar limits.  With a few exceptions, this benefit is generally allowed for the first five taxable years an individual is in the U.S. in student status.

J-1 teachers, professors and researchers generally can exempt all of their compensation income, without dollar limits, for a fixed period of time (usually a 24-month period, which could extend over three tax years).   Short-term business visitors may also be able to exempt all or a portion of their compensation paid in the form of an honorarium.  The terms of each treaty vary, however, so what is true for an individual from one country may not be true for someone from another country.

Please note that, in cases where the Tax Coordinator cannot readily determine an individual’s eligibility for tax treaty benefits, the treaty claim will be denied for purposes of processing payments.  Taxes will be withheld as if no treaty exists, and it will be left up to the payee to determine whether or not it is appropriate to make the treaty claim on the income tax return.  This is in accordance with guidelines issued by the Internal Revenue Service (IRS). 

Tax treaty benefits are not necessarily restricted to nonresident aliens (See “Determining Tax Status for Nonimmigrants in the U.S.”).  There are cases where a resident alien might also be eligible for treaty benefits.  In such cases, the income tax return filing is slightly complicated but not insurmountable.  The Tax Coordinator can offer general assistance in these situations.

The text of most income tax treaties between the U.S. and other countries can be found at http://www.irs.gov/businesses/international/article/0,,id=96739,00.html or
http://www.windstar.com/public/treaties.html.   

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