Category Archives: Visas

2019 Versions of Case Studies (Sample Returns) by Jean Mammen, EA

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Now available on website http://www.1040nror1040.com are the three case studies, on the 2019 forms.

On the website, click on the tab labelled Sample Returns.

2017 forms: The upper entries bring up the 2017 versions of the case studies.

2019 forms: The lower entry brings up the 2019 versions of the case studies.

For 2019, Schedule 1 of Form 1040, used in the tax return of Josef Masaryk, is new and changed from 2018 (not illustrated).  The 2018 form introduced Schedule 1, but the treaty tax exclusion was still subtracted on Line 21. In 2019, Schedule 1, Line 8 is where “Other Income”, or income changes, are entered. They carry to Form 1040, Line 7a.

Beginning with 2018 tax returns, generally TCJA and other tax law changes affected both Form 1040 and Form 1040NR in the same way. These included restrictions on deducting state and local income tax payments, suspending deductions for personal exemptions, and disallowing job-related deductions for employees.

Compare the bottom line on each Case Study  for 2017 and 2019!

 

Diversity Immigrant Visa (Green Card) Holders and U.S. Taxes, by Jean Mammen, EA

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Winners of the U.S. diversity immigrant visa lottery may welcome more information about the U.S. tax system. They may not have considered tax implications when deciding if or when to accept the visa and enter the U.S. Usually they have not previously spent long periods in the U.S. on a visa, and they may not have family or friends familiar with the U.S. tax system.

Taxable Income

A green card holder becomes responsible for reporting and paying U.S. taxes on total worldwide income, by U.S. tax rules, from the date they enter the U.S. on the immigrant visa and become a ‘Lawful Permanent Resident’ (LPR) (green card holder). This continues until the LPR (later perhaps citizen) formally ends that status as well as all tax responsibilities through  ‘expatriation’ procedures.

Resident vs non-resident

Let’s compare:

Taxpayer DIV was just issued an immigrant visa (IV) through the Diversity lottery program. Once admitted to the U.S., they will become a Lawful Permanent Resident, a green card holder.

Taxpayer H was just issued an H1b visa because they were sponsored for a job in the US. This is a non-immigrant visa (NIV) allowing a temporary stay.

The visas of both taxpayers were issued November 5th, 2019.

This will be the first ever visit to the U.S. for both individuals.

First situation:

Both taxpayers enter the U.S. on November 7, 2019.

Taxpayer DIV will have two different U.S. residency statuses in 2019 – non-resident alien from January 1, 2019, through November 6, 2019, and resident alien by green card, and thus a tax resident, from November 7 through December 31. Form 1040 is their tax return and Form 1040NR is attached as a statement. Total worldwide income is included on Form 1040. The Form 1040NR may show zero income if there was no U.S. source income before they entered the U.S.

Taxpayer H will begin counting days of presence in the U.S. towards meeting the Substantial Presence Test (SPT) on November 7. They will not meet the SPT in 2019 but are likely to meet it in mid-2020.

For 2019, Taxpayer H will be a non-resident alien filing on Form 1040NR and include only U.S. source income.

Second situation:

Both taxpayers delay entry into the U.S. until February 7, 2020.

Neither taxpayer will need a 2019 U.S. income tax return.

Taxpayer DIV is considered a Lawful Permanent Resident (and thus a tax resident) beginning January 1, 2020. They did not enter the U.S. until the year following the year the immigration visa was issued. Their status changed on January 1 of the following year, no matter when they entered the U.S. in the following year. Form 1040 will be the tax return. It will include total worldwide income received during the full year of 2020.

Taxpayer H begins counting days of presence in the U.S. on February 7. They will meet the SPT when the total number of days in the U.S. reaches 183. Once the SPT is met, U.S. tax residency begins on their first countable day in the U.S. in 2020, February 7. Taxpayer H will have dual tax residency for 2020 and use both Form 1040 and Form 1040NR to cover the entire year. Form 1040 will be the tax return. It will include total worldwide income from February 7 through December 31, 2020. Form 1040NR will be attached as a statement, and include only U.S. source income received from Jan 1, 2020, through February 6, 2020.

Simple or complicated tax return

If this is not the taxpayers’ first visit to the U.S., determining the date (tax) residency began will require more information and more steps.

How complicated their U.S. tax return will be will vary according to their life situation. A lottery candidate may be a young high school or college graduate, just beginning their work life, a business owner, a self-employed person, or a mid-career professional. They might be single or have a family. They might have assets in the country where they have been living. Their home country tax situation might be simple or complicated. It interacts with their U.S. tax situation.

Seek out a tax professional with experience preparing dual status returns for visa holders and immigrants. Consult the professional as soon as possible after you arrive.

  If you are an employee, you want correct tax withholding and a correct W-4 in place as soon as possible.

  If you have a business in the U.S. or in another country, you want to report this correctly on your U.S. tax return.

If you have filed an incorrect income tax return, you may not be able to renew your LPR status when it expires.

U.S. tax system is different

Perhaps in your home country there is no personal income tax.

Or, the correct tax may be deducted from most income sources before you get the money. What you get is all yours!

The U.S. describes its system as voluntary compliance by its taxpayers. They are expected to be careful to report all income, and accurately record and document any allowable expenses, deductions, or tax credits on the income tax return.

Income is sometimes described as money you have now that you did not have before. If you are the kind of person who sees coins on the ground, picks them up, and keeps them, those coins are income to you. If they add up to more than $1, their sum ought to be added to your income! That sounds silly, and probably few people who sometimes pick up a coin think about whether they have picked up enough to need reporting, but…that shows the U.S. approach to voluntary reporting!

State and Local (Income) Tax

Most states and many local jurisdictions, such as a county, a city, or a town, also require income tax filing.

Your residency status on your federal return (tax resident or a tax non-resident) may be different from on your state or local tax return. See a tax professional.

Tax Year

The U.S. uses the calendar year, January 1 to December 31, for its annual individual income tax return. Other countries use different tax reporting years. If you have income from countries that use different tax years, you will need to use monthly or quarterly statements and records to put together the financial information for use on the income tax returns.

Your tax professional will help you understand tax law and what applies to your situation.

To do list:

Consult a tax professional early.

Check out the areas of expertise of the tax professionals you are considering.

W-4: Submit an accurate W-4 to your employer. If you are married but your spouse will not have a Social Security number during the tax year, your filing status likely is Married Filing Separately. If you think even more money should be withheld to cover taxes on other income, your W-4 should reflect this. If you have children who will not be with you in the U.S. nor have a Social Security number, they will not help you on your tax return.

Keep detailed records as advised by the tax professional.

Swiss Banks Don’t Guarantee Secrecy Today

The International Data Exchange System provides regular, generally automated, exchange of financial information between the U.S. Treasury and many other governments and financial institutions. If an institution or national tax jurisdiction holds some financial information about you, likely it has been shared with other authorities.

Other Tax Forms:

Form 1116: If you pay taxes in another country on income that you must also report on your U.S. tax return, you may be able to take a Foreign Tax Credit on your U.S. income tax using Form 1116.

(Form 2555: You cannot use Form 2555 – the Foreign Earned Income Exclusion – to subtract from U.S. taxable income any money that you earned in another country before you became a U.S. (tax) resident.)

Form 8938: If you have certain specified foreign assets, which may include investment funds or retirement plans, you report them on this form. Also, if they produced income, you may need to report that income on the income section of Form 1040. Form 8938 is part of the income tax return.

Form 3520 – If you receive gifts totaling more than $100,000 from non-U.S. people you report them on Form 3520. It is not part of the income tax return. It is mailed separately to a different address.

Form 3520 is also used to report foreign inheritances, ownership of a foreign trust, or receipt of distributions from a foreign trust.

Foreign Bank and Financial Account Report (FBAR or Form FinCEN 114). If you have foreign accounts whose total value exceeded $10,000 at any time during the year, you report them on the electronic U.S. Treasury Form FinCEN 114. You submit it electronically through the bsaefiling website. Your tax professional can help you submit the form. This is a required form. Penalties begin at $ 10,000 if you knowingly do not submit it.

Leaving the U.S.

Temporary Departure:

Follow the conditions USCIS placed on you about how long you must stay in the U.S. to maintain your resident alien status, how long you can travel outside the U.S. , and when you may apply for a waiver of the conditions.

It can be a good idea to carry a copy of your most recent tax return with you. It might help you convince Customs and Border Protection that you are up-to-date on your responsibilities.

Ending U.S. Residency:

When your green card reaches its expiration date, you can no longer use it to enter the U.S. You must apply to renew it if you do want to remain a green card holder. Your income tax responsibility does not change.

If you decide you no longer wish to be a lawful permanent resident (LPR – green card holder) of the U.S., you must complete all the steps of the formal process called “expatriation”. Until you have done so, you continue to pay U.S. taxes on total worldwide income.

The main expatriation form is Form 8854

You will need the help of an experienced immigration lawyer to correctly complete all the required expatriation steps and end your U.S. tax responsibility.

Lottery Applicants:

DO NOT assume you will complete the application process or be awarded a diversity visa by the September 30 deadline if you are notified that you have been selected to apply for an immigrant visa.

DO NOT assume that you will be admitted to the U.S. when you arrive with your immigrant visa in your passport. The Customs and Border Protection Officer at the Port of Entry could refuse entry to you because of information they learned during the interview or that was added to your file after the U.S. consulate issued the visa.

Good Luck!

 

 

Visa Type Change: Changing Status, Visa, U.S. Tax Obligation, by Jean Mammen, EA

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Changing Status, Changing Visa, Changing U.S. Tax Obligation

 Part II of III

For a first-time visitor to the U.S., determining U.S. tax obligations can follow a straight path. And the same is true if you have never visited the U.S. See Part I.

If you changed your visa type during your first visit, or if this is your second visit, more possibilities exist, and more analysis is needed.

VISA TYPE CHANGE:  What are the tax and tax residency effects if you changed visa types?

If your new visa allows counting days immediately, you do so.

Example: You had an F1 visa and were still in the eXempt period. You did not count days in the U.S. as days of presence. Now you have an H1b visa. You begin to count days.

 Example: Your new visa is a kind where you can never count days, such as a G visa, or do not count days during an eXempt or eXclusion period. You do not count days while in this period.

Tax residency status change? Immediately before you got the new visa type, what was your tax residency status?  Non-resident alien? Or tax resident? Filing on form 1040NR? or on Form 1040?

Example: First visit, you were in your sixth year on an F1 visa and had begun counting days. Maybe you reached 183 days and met the SPT, or maybe you had almost enough countable days.  Then, with just a short break, you get an H1b visa. You resume counting days. On December 31st, you add together your countable days from the F visa period and the H1b visa days.  Did you meet the SPT?  If so, you are now a US tax resident. You file on Form 1040.

Example: First visit, you were in the third year of an H1b visa. You rarely left the US. You had met the SPT. After a brief break, you got a G visa and stopped having countable days of presence in the US. You had already met the SPT. You were a tax resident. You will file on form 1040 for this tax year. But the following year, you are on the G visa for all the time you are in the US. You do not have 31 countable days in the US for that tax year. Or maybe you got the G visa the following year but before you spent 31 countable days in the US.  Either way, for this year you are now a non-resident alien. If you do have US source income, perhaps from rental real estate or investment income, you are back to filing on form 1040NR.

Example: You were in the US on an H1b visa and then decided to get an advanced degree. After a brief break, you got a student visa. On this student visa, whether F1 or J1, you are usually eXempt or eXcluded from counting days for any part of five calendar years. You had met the SPT in an earlier year. You were a tax resident. You filed on form 1040. If you had at least 31 countable days in the US during this year, and were in the US for most days in the prior two years, you would remain a tax resident through December 31st of this year and file as a tax resident on form 1040 at least one more time.

You must do the math to be sure whether or not you are a tax resident. If you spent just 31 days in the U.S. in this tax year, and 365 days in the US in each of the two prior years, your three-year day count exceeds 183 by 30 days. This leaves a small margin for spending days outside the US and still meeting the SPT.  31 + 1/3(365) + 1/6(365) = 31 + 121 2/3 + 60 2/3 = 213 1/3. Then 213 – 183 = 30.

The following year is your second year on a student visa. You spent no countable days in the U.S. You are a non-resident alien. You file on form 1040NR if you have any US source income.

This Series

FIRST VISIT / NO VISIT: If you have U.S. source income, how do you choose between form 1040NR and form 1040?. What are the tax and tax residency effects?

See Part I

 

VISA TYPE CHANGE:  What are the tax and tax residency effects when you change visa types?

Part II, above

 

SECOND VISIT/MULTIPLE VISITS: If this is not your first visit to the U.S., how do you determine your tax status?

See Part III

 

 

Second Visit or Multiple Visits to the U.S.: Changing Status,Visa, U.S. Tax Obligations, by Jean Mammen, EA

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Changing Status, Changing Visa, Changing U.S. Tax Obligation

 Part III of III

For a first-time visitor to the U.S., determining U.S. tax obligations can follow a straight path. And the same is true if you have never visited the U.S. See Part I

If this is your second visit, or if you have changed visa type, more possibilities exist, and more analysis is needed. See Part II for the effects of visa type changes

SECOND VISIT/MULTIPLE VISITS TO THE US

If you leave the US, and then return on another visit, you must then look back at your past visa history to determine which form to use to report income, 1040NR or 1040.

Q: Were you a tax resident of the U.S. during any part of your most recent year in the U.S.?

Maybe you were gone only a few months, maybe you were outside the US for several years, but while here you were already a tax resident. You may or may not be a tax resident in your first year of this visit.

Q: Were you outside the U.S. for more than a full calendar year between this visit and your most recent visit? Yes? No?

If you were gone less than a full calendar year, were you a tax resident during any part of last year? And when you returned, did you become a tax resident again during this year?

If so, you continued to be a tax resident of the U.S. while you were outside the U.S.

Even if your only income was from foreign sources, and none of it was from U.S. sources, it is subject to U.S. taxation by the U.S. Internal Revenue Code provisions for form 1040.

Residency persists during this absence from the U.S. by the “no lapse” sections of the U.S. tax code: IRC 301.7701(b)-4(e)(1) and (2)

Q: Was your most recent year in the U.S. within the three-year window for counting days for the substantial presence test (SPT)? Did you have any countable days of presence? As a tourist? On an “all the rest, count your best’ visa type? Or on a student or exchange visitor (teacher, trainee, researcher) visa like F or J, after the eXempt period had ended?

If so, do the calculation over the three years to determine if you meet the SPT during this tax year.

Q: On your most recent visit, were you not able to count days for the SPT because you were on an A or G visa?

If so, double-check back through the three-year window, and do the SPT calculation over the three years, as if this were your first visit to the U.S,

Q: Is your current visa a student visa (F, J, M)? If so, to determine if you have already used up some of the 5 calendar years of the student eXempt/eXclusion period, look back all the way to 1985. Why 1985? That is the year this section of the tax code came into effect. Treasury Regulation governing the transition: 301.7701(b)-3(b)(7)(iv). Look back at your visa history during all your prior visits to the U.S. since 1985. In how many of those calendar years were you on an F, J, M, or Q visa?

Subtract that number of years from the 5 years in the ‘student’ look back period. The result is the remaining number of calendar years during which you are eXempt/eXcluded from counting days to meet the SPT.

Example:  8 years ago you were in the U.S. as a J visa high school exchange student, for an entire academic year. Now you are in the U.S. on a student F visa for a multi-year combined Master’s degree and Ph.D. program. The eXempt period on an F visa is 5 years. During your lookback period you were in the U.S. on a J visa for parts of two calendar years. 5-2=3. You have three years remaining in your eXempt period. You will start counting days of presence for the SPT on your first day in the U.S. of your fourth year in the U.S. on this student visa

Example: You accompanied your parents to the U.S. when you were a child. They left your twin sister back home with Grandmother. You were in the U.S. for all or part of three calendar years. That visit took place sometime between 1985 and last year. Your parents were on J visas. You had a J2 visa, as a dependent. Now you and your twin sister are students in the U.S. on F1 visas.

The student eXempt period lasts five years. You have already spent 3 years in the U.S.  on an F, J, M, or Q visa. Only two years remain in your eXempt period. You will start counting days for the SPT on your first day in the U.S. in the third year of this visit. Your sister will not begin counting days until after her fifth year is past. She will begin counting days on her first day in the U.S. in her 6th year on this visit.

If you have income – whether U.S. source or foreign source, you might file on Form 1040 as a tax resident as soon as your third year as a student in the U.S. Your sister would file a U.S. tax return only if she has U.S. source income, until at least her sixth year. Until then, if she needs to file a U.S. tax return, she will use form 1040NR.

Q: Is your current visa a J or Q exchange visitor visa as a teacher, trainee, researcher, etc? Look back at the six previous years to see in how many of them you were in the U.S. on an F, J, M, or Q visa. If that number is two years or more, you have exhausted the eXempt period.

Subtract that number of years from the two years available as eXempt status in the “teacher or trainee” J visa look back period. If you counted one (1) year, you have one eXempt year left before you start counting days for the SPT. If you counted two (2) or more years, you begin counting days for the SPT on your first day in the U.S. on this visit. If you counted zero (0) years on an F, J, M, or Q visa, you have the full two-year eXempt period remaining.

Example: You left the U.S. two years ago this August, after a twenty-four month stay as a J visa researcher. You returned to the U.S. on the two-year anniversary of your departure, again as a J visa researcher.

You had been in the U.S. during parts of three calendar years during the six-year lookback window. You began counting days for the SPT on the day in August that you arrived in the U.S. on this visit.  The count did not reach 183 days before December 31st. You file on form 1040NR.

You had been out of the U.S. for a full calendar year, plus some months before and after that full year. Thus, your prior status as a tax resident, during the January through August of your third calendar year in the U.S. during your previous visit, was extinguished during that full year outside the U.S.  Your previous visit was within the six-year look back period. It exhausted the two-year eXemption period potentially available for this visit.

 

This Series

FIRST VISIT / NO VISIT: If you have U.S. source income, how do you choose between form 1040NR or form 1040?. What are the tax and tax residency effects?

See Part I

 

VISA TYPE CHANGE:  What are the tax and tax residency effects when you change visa types?

See Part II

 

SECOND VISIT/MULTIPLE VISITS: If this is not your first visit to the U.S., how do you determine your tax status?

Part III, above

 

 

First Visit /No Visit to the U.S.: Changing Status, Visa, U.S. Tax Obligation, by Jean Mammen, EA

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Changing Status, Changing Visa, Changing U.S. Tax Obligation

Part I of III

For a first-time visitor to the U.S., determining U.S. tax obligations can follow a straight path. And the same is true if you have never visited the U.S.

If you have changed visa status, or if this is your second visit, more possibilities exist, and more analysis is needed.

FIRST VISIT/NO VISIT: If you have US source income to report, choosing between form 1040 and form 1040NR is relatively simple. Determine if any days you were physically in the US may be counted towards meeting the substantial presence test (SPT).

If you have no visa, or any visa except F, J, M, or Q, or A1, A2, G1, G2, G3, G4, you usually immediately begin to count all days where you spent any time at all in the US.

A common exception to counting days is for people who live in Mexico or Canada and cross the border regularly to work in the US during some period of the tax year. These “commuters” do not count as days present in the U.S. any day they commuted to or from their U.S. workplace, no matter what their visa type. IRC 7701(b)(7)(B); 301.7701(b)(3)

If you are not in the U.S., there are no days to count.

And A1, A2, and G1, G2, G3, and G4 visa holders are never going to count days.

Counting: Count the days that may be counted to see if they add up to 183 days in the tax year and meet the SPT.

Filing requirement if SPT is not met: If you have any US source income at all you will file form 1040NR. If you were not in the U.S. or this is your first visit to the US and you spent fewer than 183 countable days in the U.S., then 0+ is the threshold even if the income is not taxable. An exception is if the only US source income is from wages, and the wages are less than the amount of one personal exemption. ($4,000 for 2015)

Filing requirement if SPT is met: You will file on form 1040 as a tax resident if you meet the SPT by December 31st, and your income exceeds the form 1040 filing threshold. If you began counting days July 2, you could meet the SPT in your first year in the US.

Taxable income for form 1040 is total worldwide income from any source derived that is not specifically exempt from US income tax.  The threshold for filing is when taxable income exceeds the sum of the personal exemption and the standard deduction appropriate to your filing status (single, married filing jointly, married filing separately, etc.).  You will also pay FICA tax (Medicare and social security) on wage income if your employer and job are part of the US economy, unless you are a student in an on-campus job.

FIRST VISIT, second year: If you have any visa other than F, J, M, or Q, or A1, A2, G1, G2, G3, G4, you could meet the SPT in your second year in the US and change from tax non-resident to tax resident.

FIRST VISIT, third and sixth year: In the third year of your first visit to the US, J visa exchange visitors usually start counting days for the SPT on their first day in the US after January 1st.  Students usually do so in their sixth year in the US. You could meet the SPT by December 31st and become a tax resident for the year if you spend most of your days in the U.S.

Substantial Presence Test (SPT):

When day counting is allowed, and you spent at least 31 countable days in the U.S. in the tax year, then:

Count all countable days present in the U.S. in the tax year, and add:

1/3 of all countable days present in the first prior year, plus

1/6 of all countable days present in the second prior year.

Add any fractions to the whole numbers.

If the total reaches 183 by December 31st, you have met the SPT. You are a U.S. tax resident.

 

LET ME COUNT!

G or A, No Way!

F, J, M, or Q, There’s a Delay Waiting for you!

All the rest, Count your best!*

*includes A3, G5

 

This Series

FIRST VISIT/NO VISIT: If you have U.S. source income, how do you choose between form 1040NR and Form 1040? What are the tax and tax residency effects?

See above

VISA TYPE CHANGE:  What are the tax and tax residency effects when you change visa types?

See Part II

SECOND VISIT/MULTIPLE VISITS: If this is not your first visit to the U.S., how do you determine your tax status?

See Part III

 

 

Green Cards and Wages from an Embassy or International Organization: U.S. Tax Court Explains It All , by Jean Mammen, EA

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Sole Abrahamsen, a green card holder, and her husband, Clifford Abrahamsen were the Petitioners in 142 T.C. No. 22, decided on June 9, 2014.

This green card holder and her husband had not declared her wages from work at the Finnish Mission to the United Nations on several years of tax returns. When queried, they claimed the wages were exempt from U.S. income tax under one or another exception.

Green cards holders (resident aliens) are taxed the same as U.S. citizens: gross income “from whatever source derived”, IRC 61(a), minus exemptions, adjustments, deductions, credits or other items allowed in the tax code to determine taxable income and tax liability, as provided in IRC 62, 63, 67, and 68, code sections on credits, and treaties that provide for exemptions. The tax code recognizes treaties as equivalent authority by IRC 894 and IRC 7852(d).

The plaintiffs cited several reasons why the wife’s wages were not taxable:

  • The U.S. tax code:  IRC 893(a) or 7701(b)(5)(B). Taxpayers often must show that the other country could and would offer equivalent tax treatment to a U.S. citizen or resident.
  • Three treaties:
    • The U.S.- Finland Tax Treaty
    • The Vienna Convention on Diplomatic Relations
    • The Vienna Conventions on Consular Relations
  • And the International Organizations and Immunities Act

The June 9, 2014, U.S. Tax Court ruling analyzed the petitioners’ arguments and dismissed each one as not applicable.

The court summarized its ruling:

Held: I.R.C. sec. 893 does not apply to wages P-W (plaintiff’s wife) received from the Mission during 2004-09 because she had previously executed a valid waiver of rights, privileges, exemptions, and immunities.

Held, further, neither the U.S.-Finland tax treaty, the Vienna Convention on Diplomatic Relations, the Vienna Convention on Consular Relations, nor the International Organizations Immunities Act provides an income tax exemption to permanent U.S. residents working in nondiplomatic positions for international organizations.

Click below for the full text of the Tax Court ruling: https://www.ustaxcourt.gov/InOpHistoric/AbrahamsenDiv.Lauber.TC.WPD.pdf

The court explained its ruling on the various claims as follows:

IRC Section 893: It sets the criteria for excluding foreign government and international organization compensation from U.S. taxation. Taxpayers often must show that the other treaty signatory country could and would offer equivalent tax treatment to a U.S. citizen or resident.

The IRS produced a copy of the original I-508 waiver signed by the plaintiff.  By signing the waiver, an individual working in the U.S. under visa A, G or E (treaty trader or investor) states that they wish to become a lawful permanent resident alien and so are giving up any rights, privileges and exemptions associated with that work status.

The court ruling stated:

“petitioners cite no statute or judicial precedent to support their assertion that we can ignore a validly executed waiver. We accordingly conclude that the waiver was effective as of January 29, 1992. All income that Ms. Abrahamsen received from the Mission after that date is ineligible for the section 893 exemption and is subject to Federal income tax unless some other exemption applies. See Ying v. Commissioner, 99 T.C. 273, 293 (1992)”

U.S. – Finland Treaty

The savings clause in the treaty made the wages paid by the Finnish mission to the plaintiff’s wife taxable by the country where the petitioner was resident, despite the provisions of any other treaty article, such as the one on government work.

The Tax Court opinion stated:

“Specifically, petitioners contend that tax exemption is afforded by article 19 of the Treaty, which concerns remuneration received for “Government Service.” “Article 1, paragraph 3 of the Treaty contains a “saving clause” that over-rides certain of its other provisions. This saving clause provides that “[n]otwithstanding any provision of the [Treaty] except paragraph 4, a Contracting State may tax a person who is treated as a resident under its taxation laws.” Treaty, Tax Treaties (CCH) para. 2945.01, at 73,011. Article 1, paragraph 4 states that benefits conferred under article 19, dealing with government service, are unaffected by the saving clause, but only in the case of “individuals who are neither citizens of, nor lawful permanent residents in, that State.” Ibid.

 “During the years at issue Ms. Abrahamsen was a “lawful permanent resident in” the United States, and the exclusion set forth in article 1, paragraph 4, does not apply. The saving clause is thus operative, and it authorizes the United States to tax any person “who is treated as a resident under its taxation laws.” As a permanent resident, Ms. Abrahamsen was a “resident” for U.S. tax purposes. See sec. 7701(b)(1)(A)(i). Thus, regardless whether her compensation from the Mission was derived from “Government Service” within the meaning of article 19, her wages were subject to Federal income tax under the saving clause. 3

3 The Treaty was amended in 2006. See 2006 Protocol to the 1989 U.S.-Fin. Income Tax Treaty, May 31, 2006, Tax Treaties (CCH) para. 2946. This amendment, which applies to petitioners’ Federal income tax liabilities for 2008-09, see id. art. IX, does not affect the analysis. Under the 2006 amendment, the United States may tax Ms. Abrahamsen as a “resident.” See id. arts. I and II. Because she was a U.S. permanent resident during 2008-09, she is covered by the saving clause. See id. art. I(4) and (5).

Diplomatic Status

The Vienna Conventions provide many protections for diplomats and consuls. The Court found that Ms. Abrahamsen was neither one.

“Petitioners argue that Ms. Abrahamsen’s wages were exempt from taxation pursuant to other provisions of international law. Central to these arguments is the assertion that Ms. Abrahamsen held diplomatic status for the years at issue. Petitioners provide no support for this assertion. Rather, they simply describe her duties and conclude that her “position with the Mission is clearly diplomatic in nature.”

“The evidence respondent provided shows this assertion to be incorrect, at least for U.S. tax purposes. During the relevant period Ms. Abrahamsen was employed by the Mission as either an adviser or an attaché. The United Nations did not notify the United States that she held a diplomatic title with regard to either position, and her name did not appear on the List of Officers Entitled to Diplomatic Privileges and Immunities maintained by the U.S. Mission to the United Nations. Concluding as we do that Ms. Abrahamsen did not have diplomatic status or rank, we address petitioners’ arguments briefly.

Petitioners posit that article 34 of the Vienna Convention on Diplomatic Relations (VCDR) exempts Ms. Abrahamsen’s wages from taxation. Convention on Diplomatic Relations and Optional Protocol on Disputes, U.S.-Vienna, Apr. 18, 1961, 23 U.S.T. 3227. However, article 34 applies only to a “diplomatic agent.” Article 1 of the VCDR defines a “diplomatic agent” as a “head of the mission or a member of the diplomatic staff of the mission.” “Diplomatic staff” is defined to mean “the members of the staff of the mission having diplomatic rank.” Because Ms. Abrahamsen did not have diplomatic rank, she was not a “diplomatic agent” under the VCDR, and article 34 therefore did not exempt her wages from taxation. 4

4 There is no merit to petitioners’ suggestion that article 49 of the Vienna Convention on Consular Relations (VCCR) exempts Ms. Abrahamsen’s wages from U.S. tax. The VCCR does not apply to the Mission. See City of New York v. Permanent Mission of India to United Nations, 533 F. Supp. 2d 457, 460 (S.D.N.Y. 2008) (holding that “[t]he tax status of the consular portions of the premises is controlled by Article 32 of the Vienna Convention on Consular Relations” and that “[t]he tax status of the U.N. Mission portions of the premises is controlled by the Vienna Convention on Diplomatic Relations”), rev’d on other grounds, 618 F.3d 172 (2d Cir. 2010).

International Organization and Immunities Act This U.S. law provides for the rights, privileges and immunities, including exemptions from certain taxes, enjoyed by international organizations and their staff members who are not residents, and/or, in a few case, not citizens, of the country where they are located. These are similar to the rights, privileges, and immunities accorded to foreign government officials.

The court ruling states:

“Petitioners next argue that Ms. Abrahamsen’s wages are exempt from tax pursuant to the International Organizations Immunities Act (IOIA). See 22 U.S.C. sec. 288d (2006). Even if the IOIA applied to Ms. Abrahamsen, which respondent disputes, the law does not confer the benefits petitioners claim. Under the IOIA, employees of foreign governments and international organizations are “immune from suit and legal process relating to acts performed by them in their official capacity and falling within their functions as such representatives, officers, or employees.” 22 U.S.C. sec. 288d(b). This case arises from Ms. Abrahamsen’s earning income within the United States as a permanent resident of the United States. She is not being subjected to liability for any act performed in her official capacity, and the earning of income is not part of her official function as a representative of Finland to the United Nations. Therefore, the IOIA does not exempt her wages from Federal income tax. See United States v. Coplon, 84 F. Supp. 472, 474 (S.D.N.Y. 1949) (IOIA “does not confer general diplomatic status immunity” but confers immunity on U.N. officers and employees only “for the category of acts performed by them in their official capacity and falling within their functions as such officers or employees”); sec. 1.893-1(b)(3), Income Tax Regs. (quoting the relevant provisions of the IOIA, including that “[n]o person shall, by reason of the provisions of this title, be considered as receiving diplomatic status * * * other than such as are specifically set forth herein”).

Note: Revenue Ruling 2007-60 is not cited by the court and would not apply. It states that a treaty-based tax exemption continues to exist after an IRC section 247(b) waiver is signed that makes someone subject to the tax code and unable to claim income exclusion under the tax code.

The court held that the U.S.- Finland Treaty did not exempt the wages paid to the plaintiff’s wife from U.S. taxation.

The treaty founding the United Nations does not include an exemption from U.S. taxation on U.N. wages for green card holders (non-citizen U.S. residents), unlike the founding treaties of the IMF, IBRD, and IADB.

The I-508 Waiver: Revenue Ruling 2007-60 states:

Alien individuals employed by a foreign government or international organization in the United States, who file the waiver provided by section 247(b) of the Immigration and Nationality Act (USCIS Form I-508) will be entitled to any tax exemption conferred under the provisions of an applicable income tax treaty, consular agreement, or international agreement that is still in force, to the extent the application of the exemption is not dependent upon the Internal revenue laws of the United States.

References cited

https://www.ustaxcourt.gov/InOpHistoric/AbrahamsenDiv.Lauber.TC.WPD.pdf

IRC 61          Gross income

IRC 62          Adjusted Gross Income

IRC 63          Taxable Income

Standard deduction, personal exemptions,   itemized  deductions

IRC 67          Miscellaneous Itemized deductions, and other Schedule A deductions

IRC 68          Overall Limitation on Itemized Deductions

Credits           Look up specific credit in the tax code

IRC 7701(b)(1)(A)(i) Resident of the U.S.

IRC 893(a) or 7701(b)(5)(8) Non-taxability of foreign government wages

IRC 894, 7852(d)    Tax Treaty provisions equivalent to tax code

Rev. Rul. 2007-60    Provisions of a treaty are not affected by I-508 waiver

The Vienna Conventions on Diplomatic and Consular Relations

The International Organization Immunities Act  Public Law 291, 12/29/1945

22 U.S.C, section 288(d)

E.O. 9698     Lists the public international organizations entitled to enjoy certain                               privileges, exemptions and immunities

List is available as:

State Department 9 FAM 41.24 Exhibit I, and

National Archives list found by searching on “E.O. 9698”

 

READ THE VISA FOR HELP WITH TAX TREATMENT, by Jean Mammen, EA

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The schematic of a U.S. entry visa (below) shows where to find information useful in determining the correct tax treatment of the visa holder. (Illustration from the U.S. Department of State website, visa FAQ)

how-to-read-a-visa  First, a puzzling entry: the letter ‘R’ printed below the words ‘Visa Type/ Class.  It does not speak about the visa.  It says the passport is a Regular passport, not one for someone travelling as an Official, or a Diplomat, or a family member of an official or diplomatic traveler. Visa Type/Class is shown to the right of the passport indicator (usually R),  and below the words Type/Class.

The passport in which the visa has been stamped will likely be from the country of citizenship of the visa holder. The location where the visa was issued – top, just to the right of the individual’s photo – is likely to be in the country where the visa holder was resident when the visa was issued.

Benefits in bilateral income tax treaties often apply to anyone who was a resident of one of the two countries immediately before the person entered the other country. Some treaties do not state ‘immediately before’. Some treaties apply only to citizens, in some cases without regard to residence.

Knowing the location where the visa was issued, the date the visa was issued, and the date the person entered the U.S., helps clarify whether a visa holder may claim a treaty benefit. The date the person entered the US is often stamped on the passport page facing the visa. It is also important to know if the visa holder had earlier visas, perhaps in another passport, and to know the visa type  and date issued and the purpose of the visit.

Using this information, check the treaty or tables in Publication 901 for:

-potential treaty benefits for the visa holder, and

-if the visa holder qualifies now for the treaty benefit, or,

-if the visa holder does not now meet all the qualifications  for a benefit   — –

Click here to go to book website

Which visa holders should put in new withholding forms now?

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Visa holders may need to submit new withholding forms to adjust for treaty income exclusions or changes in tax status. Tax residency will affect how payors should withhold for income tax and FICA taxes (social security and Medicare). A visa holder should alert payors to these situations.

International students and exchange visitors (F, J, M, Q visa holders) may need to submit updated withholding documents for 2014 to their sponsors or employers. The payor needs a signed withholding form from the payee to start or change special withholding even if it is aware of every change in the situations of all its payees,

Treaty Exclusions: People who claim bilateral income tax treaty exclusions submit Form 8233 to the payor. They should submit new forms each year they claim the exclusion. If the treaty-based income exclusion will end this year, before the income does, the payor may find this information helpful.

If the treaty excludes only part, and not all, of the income from U.S. taxation, submit both a W-4 and a Form 8233 to the payor.

Residency change: Some visa holders will become tax residents during the year by meeting the substantial presence test. Some will be married to a U.S. citizen or resident and the couple will elect to file jointly as residents on Form 1040. Either change will make certain compensation subject to FICA – social security and Medicare tax – from the beginning of the year. And, changing tax filing from form1040NR to 1040 may change the taxable income and the withholding needed.

FICA – Federal Insurance Contribution Act: Provides for collecting social security tax and Medicare tax. There is no form for starting or stopping FICA withholding. If your payor is erroneously collecting FICA when you are exempt from paying it, or not collecting FICA when you are not exempt from paying it, you should so notify your employer in person and in writing. You may need to cite government regulations or publications to make your case.  These situations are presented in a single IRS article which can be found by going to the IRS website, www.irs.gov, and entering into the search box ‘J visa and FICA’.  Looking in Publication 519, or the Internal Revenue Code,  requires synthesizing information from three different locations. This is more confusing than the IRS article for those who are not tax nerds.

F,J,M,Q visa holders are exempt from paying FICA income earned in compliance with their visa while they are considered to be temporarily in the U.S. This ends when they are no longer exempt from counting days towards substantial presence and have qualified as tax residents by the substantial presence test.

All students who are at least half-time students at the school, college, or university that pays them, and are not career employees, are exempt from paying FICA on that income. This ‘student FICA exemption’ has many twists and turns, known as ‘facts and circumstances’. Rev. Proc. 2005-11 is meant to clarify who qualifies, even when at first glance they might not, for instance, might seem to be career employees

(Note: Visa – based FICA exemptions apply only to the primary visa holder, as, J1. Spouses or dependents on secondary visas, as, J2, would generally pay FICA tax as well as income tax on compensation).

Citations

INA (Immigration and Naturalization Act) 101 (a)(15) – Definitions of types of visas

IRC (Internal Revenue Code) 3121(b)(19) – F,J,M,Q visa holders temporarily present in U.S. do not pay FICA taxes – social security and Medicare

IRC 7701(b) – Defines how visa holders determine (tax) resident alien or non-resident alien status

IRC 3121(b)(10) – Students employed by their school, college, or university do not pay FICA on those wages. (The ‘student FICA exemption’)

    Rev. Proc. 2005-11 elaborates on how facts and circumstances determine     eligibility for the student FICA exemption.

 

Social Security Handbook Citations

    Section 939 – Foreign Students, Exchange Visitors, and International Cultural     Visitors

IRS Publications

    Publication 519 – U.S. Tax Guide for Aliens

    Publication 515 – Withholding of Tax on Nonresident Aliens and Foreign Entities

Click here to go to book website

blog site 1040NR? or 1040?: http://blog.1040nror1040.com/
email: jean@1040nror1040.com