TAX TREATY BENEFITS FOR STUDENTS
AND BUSINESS APPRENTICES FROM INDIA

by Paula Singer, Esq. 

The United States has income tax treaties with over 60 countries, all of which provide exemption from tax for residents of the treaty country who come to the United States for the primary purpose of their education or training. U.S. treaty policy as embodied in Article 20 of the U.S. Model Treaty is to provide tax exemption for payments for full-time education and training that arise outside the United States. Over one-half of the U.S. treaties provide for such a limited benefit for students and trainees including Article 21(1) of the treaty with India. However, the treaty with India provides an additional benefit for students and business apprentices.

Unique Treaty Benefit
Article 21(2) of the treaty with India provides a unique benefit for students and business apprentices who were residents of India immediately before visiting the United States for the purpose of their education or training. These students and apprentices are entitled, during such education and training, to “the same exemptions, reliefs, or reductions in respect of taxes available to residents” of the United States. (IRS treaty policy does not allow treaty benefits for individuals who enter the United States in one status, such as H-1B or F-2, and later change their status to that of a student or trainee.)

The IRS issued Revenue Procedure 93-20 interpreting Article 21(2).

1. Resident or Nonresident
Students and business apprentices are not treated as residents by virtue of Article 21(2) of the treaty. They will only be treated as residents of the United States if they meet one of the two residency tests specified in Section 7701(b) of the Internal Revenue Code. Under these tests, foreign nationals who are U.S. lawful permanent residents or who are substantially present in the United States under the 183-day residency formula are residents of the United States. The same residency rules apply to dependents in derivative status (such as F-2 and J-2) who accompany students and apprentices.

Students and apprentices who do not meet one of the residency tests remain nonresidents and must submit a Form 1040NR or 1040NR-EZ tax return, not a Form 1040.

2. Filing Status
Married nonresidents must file separately using married filing separately rates (the highest rates). An exemption, relief, or reduction does not include the ability to file a joint return or to use head of household status and rates.

Nonresidents married to a U.S. citizen or resident may elect to file as a resident under Section 6013(g) of the Code and use married filing jointly rates (the lowest rates). Instructions for this election are in IRS Publication 519, U.S. Tax Guide for Aliens. (Residents making this election must include their worldwide income in their Form 1040 tax return.) This election is available for wage withholding purposes as well.

3. Personal Exemptions
Generally, nonresidents may claim only one personal exemption. Also, personal exemptions for dependents generally may only be claimed for U.S. citizen or resident dependents.

Students and apprentices from India may claim additional personal exemptions under Article 21(2) of the treaty. They may claim a spousal exemption provided the spouse has no gross income and is not the dependent of another taxpayer. Personal exemptions may also be claimed for children born in the United States (because they are U.S. citizens) and dependents who become residents under the 183-day formula.

Students and apprentices with employment income may use the additional exemptions on their Form W-4. Recipients of taxable scholarships or fellowships who do not use their personal exemptions for employment income may use these personal exemptions as a withholding allowance to offset their taxable grants on Form 1042-S.

Students and apprentices claiming more than one personal exemption on their tax return must use Form 1040NR.

4. Standard Deduction
Unlike other nonresidents, students and apprentices from India may claim the standard deduction on their nonresident tax return. The standard deduction for single and married filing separately status is the same. They may not use the standard deduction for married filing jointly status.

This treaty benefit is reflected in the new calculation procedures for withholding on wages for nonresident employees. Wages of students and apprentices eligible for the treaty benefit are not adjusted to offset the standard deduction built into the wage withholding table because they can claim the standard deduction.

NOTE: Students working on-campus as teaching or research assistants or off-campus as teachers or researchers for practical training may not claim the benefits of Article 22, Payments Received by Professors, Teachers, and Research Scholars because their primary purpose for being in the United States is to study.

Paula Singer, Esq., Co-founder and Chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer, Newton, MA has over 25 years of experience providing advice and compliance services to individuals, their employers, and payors on cross-border employment matters.

Watch for Volume 3, Number 2 for a discussion on for a discussion on "Honorarium Payments."

Q. Are students and apprentices from India required to submit a Form W-4 under the new rules for nonresident employees?

A. Yes, because they are subject to wage withholding limitations that apply to nonresident employees. They must complete Form W-4 as an NRA using single status, even if they are married, and they may not claim “exempt.” They are among those nonresident employees who may claim additional personal exemptions. However, withholding on their wages is not to be adjusted in the payroll calculations for the standard deduction.

Spring NRA Training

Sign up now! Don’t miss out on Windstar’s Spring NRA Training scheduled for April 25-28 at the Boston Marriott Newton. Get up-to-date info on changes to IRS rules and regulations, including W-4s and Acceptance Agent applications.

Tax Analysts Publishes Paula Singer Article

The January 16, 2006 issue of Tax Analysts' Tax Notes International published Paula Singer's article, “New U.S. Acceptance Agent Application Procedures for Nonresident Taxpayers.” The article also appears in their worldwide on-line service, Worldwide Tax Daily. If you would like a copy of the article, please e-mail your request to editor@windstar.com.

Alliance ‘06
HEUG (PeopleSoft Higher Education Users Group)
Opryland Resort & Conference Center, Nashville, TN
March 12-15, 2006
Booth 424

Gary Singer, President and CEO, Windstar, and Andy Beecham, LogicGate Consulting, will present "Payments to Foreign Nationals - The Windstar Oracle | PeopleSoft Integrated Solution for 1042-S Processing" in the HRMS track on March 13, from 1:00 pm to 2:00 pm.

Datatel Users' Group Conference & Expo
Marriott Wardman Park Hotel, Washington, DC
March 18-22, 2006

Gary Singer and Paula Singer will present Introduction to "U.S. Nonresident Alien Tax Withholding for HR/Payroll."

SunGard Summit 2006
Orlando, Florida
April 2 -5, 2006
Booth 204

Gary Singer, President and CEO, will present "SCT Banner HR & Windstar Interface" on April 4 from 10:30 to 11:30.

©Copyright 2006 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.