J Exchange Visitors: Resident or Nonresident

by Paula N. Singer, Esq. 

A foreign national’s immigration status and countable days of U.S. presence over a three-calendar year period determine the foreign national’s U.S. tax residency status. Foreign nationals’ U.S. tax residency status determines the federal tax return that they must file as well as the withholding and reporting rules that their employers and payers must apply to their income payments. Residency status can also determine if income tax treaty benefits are lost or maintained.

Nonimmigrants are resident aliens if they are physically present in the United States at least 31 countable days in the calendar year in question, and their U.S. presence over a three-calendar-year period satisfies the 183-day residency formula (called the “substantial presence test,” or “SPT”), unless an exception applies. There are two exceptions that can apply to J Exchange Visitors.

J-1 Exchange Visitor Programs provide for various categories of exchange visitors and define the rules that apply to each category. For tax policy reasons, foreign nationals in J Exchange Visitor status do not count their days of U.S. presence for purposes of the 183-day residency formula for a specified number of calendar years, thus remaining nonresident aliens for U.S. income tax purposes longer than most other nonimmigrants. These foreign nationals are referred to as “exempt individuals” for the periods that they are exempt from counting days for purposes of the 183-day residency formula.

A J-1 Exchange Visitor’s category determines which special exceptions apply for counting days. One rule applies to “students” and another rule applies to “teachers and trainees.” “Students” are J Exchange Visitors present in the United States in the student category. “Teachers and trainees” are J-1 Exchange Visitors in all other J categories. (You can find the category on the Exchange Visitor’s Form DS-2019, Certificate of Eligibility for Exchange Visitor Status). For purposes of this article, “teachers and trainees” are referred to as J Nonstudents. The tax rules apply to spouses and other dependents in the United States in J-2 derivative status as well as to the J-1 principal.

5-Calendar-Year Rule for J-1 Students

A special 5-calendar year rule applies to maintain nonresidency status for J-1 Students. J-1 Students are exempt from counting U.S. days for purposes of the 183-day residency formula for 5 calendar years. J-1 Students in the United States for more than 5 calendar years must generally begin counting U.S. days for purposes of the 183-day residency formula. Just one U.S. day in the calendar year counts as one calendar year for purposes of determining exempt years. This is a once-in-a-lifetime test. J-1 Students who have been exempt from counting U.S. days for 5 calendar years (beginning in 1985, the first calendar year for which the 183-day residency formula was effective) must count their U.S. days for purposes of determining their U.S. tax residency status. In the typical situation, a J-1 Student must begin counting days in the 6th calendar year in the United States as a student. However, the individual must also take into consideration calendar years as an exempt individual in any F, M, J, or Q immigration status in the prior years as well.

The rules allow students to continue to be exempt from counting days for purposes of the 183-day residency formula if they can prove to the IRS their intent not to reside permanently in the United States. This extension is claimed on a supplementary statement that is filed with Form 8843.

2-out-of-7-Year Rule for J-1 Nonstudents

A special 2-out-of-7 calendar year rule exempts J-1 Nonstudents such as trainees and short-term visitors from counting days for purposes of the 183-day residency formula. Under this exception, a J-1 Nonstudent who has not been in the United States as an exempt individual at any time in the prior 6 calendar years is a nonresident alien for tax purposes. In the typical situation, a J-1 Nonstudent is a nonresident alien for two calendar years in the United States. J-1 Nonstudents in the United States for two years or longer become resident aliens in their 3rd calendar year when their U.S. days add up to 183 days. J-1 Nonstudents who have been in the United States as exempt individuals before, for example as F-1 or J-1 Students, will become resident aliens sooner if those years are in their prior six calendar years.

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

Watch for Volume 4, Number 5 for a discussion on “J-1 Exchange Visitors Paid by Foreign Employers.”

Q: Does being an “exempt individual” mean that I am exempt from taxes?

A: No, it means only that you are exempt from counting U.S. days for purposes of determining your U.S. tax residency status. You may be exempt from tax under other tax rules or treaties. For example, the NRA FICA exception applies to nonresident alien (but not to resident alien) J Exchange Visitors. Also, you may be eligible for income tax exemption under an income tax treaty with your country of residency provided you meet the conditions of the treaty and provide the required paperwork for the tax exemption.

Save the Date: Year-end Nonresident Alien Training Workshop December 4th – 7th

Windstar will hold its Year-end Nonresident Alien (NRA) Training workshop Tuesday, December 4th through Friday, December 7th at the Boston Newton Marriott in Newton, Massachusetts. Windstar’s experts will provide substantive training on immigration rules related to paying foreign nationals, determining tax residency, the special withholding and reporting rules for wages, scholarship, and fellowship grants that apply to nonresidents, and exemptions from tax under the law and treaties. Included will be a complete review of filing procedures and strategies for IRS Forms 1042 and 1042-S. All workshop participants will also receive hands-on training on International Tax Navigator ®.

The registration cost is $1,350 for the first attendee from an institution and $1,200 for each additional attendee. There is also an additional $300 fee to attend the “Introduction to Tax Navigator” session from 12:30 p.m. – 5:30 p.m. on Tuesday, December 4th. A discounted hotel rate of $145 per night for single or double bedrooms is available by calling 617-969-1000 before November 19th.

Complete session and registration information will be available at www.windstar.com in early September.

Windstar Experts Paula N. Singer and Linda Dodd-Major Honored as American Payroll Association’s Payroll Hall of Fame Inductees

The American Payroll Association (APA) inducted Windstar experts Paula N. Singer, Esq. and Linda Dodd-Major into their Payroll Hall of Fame at their recent annual congress. Paula, Windstar’s chairman, and Linda, a contributor to Windstar’s client forum and training sessions, are frequent speakers on international taxation and payroll matters at national and regional APA conferences and seminars. Both Paula and Linda are past recipients of Meritorious Service Awards from the APA for educating its membership on the complex rules related to payments to foreign persons.

Windstar and tax advisory services firm COKALA are presenting two-day nonresident alien payment classes this August and November in Boston, Chicago, and Phoenix. The training program has separate tracks geared specifically for educational organizations and corporations and will educate attendees on tax regulations governing payments to non-U.S. companies and individuals - and the immigration laws that may prohibit payments to those foreign visitors or vendors. Windstar experts Paula N. Singer, Esq., Linda Dodd-Major, and Terri Crowl are serving as session presenters for the program.

Below are the training locations and dates:

• Chicago, August 23 – 24, 2007
• Boston, August 28 – 29, 2007
• Phoenix, November 27 – 28, 2007

To register or learn more, visit www.cokala.com.

Strengthen Your Immigration Tax Practices with Windstar Publishing’s Employment Series

Windstar Publishing’s Employment Series guidebooks explain tax rules that apply to foreign nationals working in the United States under four common immigration classifications:

• B-1 Business Visitor
• H-1B Specialty Workers
• J-1 Nonstudent Exchange Visitors
• L-1 Intracompany Transferees

Each guidebook contains charts and flowcharts along with sample letters and IRS forms and instructions.

Click here for a comprehensive description of topics covered in each guidebook.

Windstar Will Dock at These Upcoming Trade Shows

Association of Independent Research Institutes (AIRI) 46th Annual Meeting
September 23 - 26, 2007
Hyatt Regency San Antonio
San Antonio, TX

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National Association of Tax Reporting & Payroll Management (NATRPM) 2007 Annual Conference
September 24 - 26, 2007
Hyatt Fairfax
Fairfax, VA

Don’t miss Windstar experts Paula N. Singer, Esq. and Linda Dodd-Major’s presentation on “Understanding Payments to Foreign Nationals.”

©Copyright 2007 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.

Since 1995 educational institutions, hospitals, research institutions, and corporations have relied on Windstar Technologies, Inc. to deliver the expertise to comply with the U.S. tax residency rules, tax rates, and special tax exemption rules under the law and U.S. treaties.  When government agencies require information about foreign nationals in the workplace, Windstar provides straightforward analysis and reporting.  Comprehensive software for analysis and reporting, expert knowledge, and unparalleled customer service combine to make Windstar the first choice for nonresident alien tax compliance.