Tax Treaty Benefits for Professors and Teachers

by Paula N. Singer, Esq. 

The United States has income tax treaties with over 60 countries, two-thirds of which provide exemption from tax for compensation for teaching at a school, college, or university.  Most treaties require the organization to be accredited.  These treaties (except for treaties with Greece and Pakistan) also include benefits for engaging in research for the public benefit.  Some treaties appear to require that the individual be a professor or teacher before coming to the United States, but IRS rulings state that is not required.  Students who are teaching or conducting research pursuant to employment authorized by their student status are not eligible for teaching or research benefits.

Most treaties provide an unlimited benefit amount to residents of the treaty country for two years from the date of arrival in the United States for the purpose of teaching or conducting research.  The treaty with Greece provides a three-year benefit, as does the treaty with the Peoples Republic of China.  However, teacher benefits under the former treaty generally expire before the specified time period due to residency restrictions, and the latter treaty has an aggregate benefit which may be taken over a period of nonconsecutive years.  The treaty with Turkey limits benefits to payments from abroad.

1. Benefit Limitations
Treaty articles include a variety of limitations.

Retroactive Loss of Benefits: Under this provision, an individual who physically overstays the two-year benefit period loses the benefit to the first penny earned. Employers should not provide the benefit for individuals whose immigration documents or other information, such as employment contracts or offer letters, indicate that they will overstay the benefit period, typically the case for individuals in H-1B status.  Individuals extending their stay beyond two years must amend their prior year tax returns and pay the taxes and interest; penalties may be waived.

Prospective Loss of Benefits: Some treaties limit benefits to professors and teachers who come for a period “not anticipated to exceed two years.” Individuals whose immigration documents indicate a longer stay are not eligible for this benefit.  However, individuals whose immigration documents indicate a stay of two years or less do not lose their benefit if they stay beyond two years because of an unexpected extension of stay or a change of immigration status.  Treaties with this limitation also typically limit benefits to individuals invited by a school, college, or university or government agency.  Therefore, benefits could be denied to teachers invited to the United States by recruiters who lack other evidence of such an invitation.

One-Time Use: Many of the newer treaties limit the use of the benefit to one time.  The benefit may be used for multiple visits only when the visits fall within a two-year period beginning with the date of arrival for the first visit.

2. The Requirement to Reestablish Residency
A long-standing IRS policy applies to individuals who come to the United States to study, acquire training, teach or engage in research and later change status.  IRS rulings (GCM370-47 and Rev. Rul. 77-242) require the reestablishment of physical presence and residency in the treaty country and an absence from the United States for a period of at least one year (365 days).  (Visits for an unrelated purpose such as a U.S. vacation will not cause the year’s absence to begin again.) Besides ensuring a long enough time for treaty country residency to be reestablished, the policy prevents individuals from claiming benefits for overly long periods (unless allowed by the treaty language) by changing immigration status and the resulting purpose for their visit, or leaving the United States and entering and claiming treaty benefits again after a short absence from the United States.

Back-to-Back Rule: Some treaties specifically include this policy with a Back-to-Back Rule which states that benefits for teaching “shall not be available to an individual for any period immediately following a period for which the benefits of [the Student/Trainee Article] were enjoyed.”  Two treaties (The Netherlands and Portugal) also specifically prohibit use of the Student/Trainee Article after Teacher/Researcher benefits are enjoyed.

Combined Benefit Period: A few treaties specifically allow an individual to claim treaty benefits for teaching following a change of status, with a combined benefit period of 5 tax years.  The two benefit periods are measured from the date of arrival for studying or training with the result that the two-year benefit for teaching may be cut short.

3. Saving Clause and Exceptions
Because the United States imposes citizenship-based taxation, U.S. treaties include a provision allowing the United States to tax its citizens and residents as if the treaty did not come into effect (called the “saving clause”).  However, treaties (except for the treaties with Greece and Pakistan) allow individuals who have become tax resident in the United States under the 183-day substantial presence test to preserve the benefits conferred by treaty articles covering studying, acquiring, teaching or engaging in research.

4. Claiming Exemption from Tax
Nonresident aliens claim exemption from tax for teaching by submitting a completed and signed Form 8233 to their employer prior to payment.  Form 8233, which is required annually, must be submitted to the IRS for review to be valid.  Nonresident aliens must also make their treaty claim on a Form 1040NR-EZ or Form 1040NR tax return.

Resident aliens claim exemption from tax on Form W-9 with an attachment explaining the treaty article benefit and saving clause exception.  They claim their treaty benefits following the instructions provided for such Form 1040 tax return claims in IRS Publication 519, U.S. Tax Guide for Aliens.

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 5, Number 4 for “Tax Treaty Benefits for Research.”

Q: The new Protocol for the treaty with Germany eliminated the retroactive loss provision for teachers and researchers staying in the U.S. beyond 24 months.  Since the Protocol took effect for tax year 2008, what should people do for tax year 2007 and prior years?  Example:  A German resident came to the U.S. to conduct research at a university May 15, 2006, planning to remain until December, 2008.  He did not claim treaty benefits on his 2006 return, knowing about the retroactive loss provision.  Can he claim the benefit on his 2007 return?  Can he amend his 2006 return to claim treaty benefits?

Register Today for Windstar’s Summer Nonresident Alien Training Workshop August 5 – 8, 2008

Windstar’s Summer Nonresident Alien Tax Training will be held August 5th – 8th at the Hilton Boston/Dedham in Dedham, Massachusetts.  Windstar’s nonresident alien experts will provide you with substantive training on what you need to stay compliant with nonresident alien tax and immigration rules.  In addition to learning how to prepare yourself and stay ahead of the IRS’ increased attention to nonresident alien tax compliance, you will also learn how to use International Tax Navigator® to its fullest.

The registration cost is $1,350 for the first attendee from an institution and $1,200 for each additional attendee if registered by June 30th.  After June 30th the registration cost is $1,450 for the first attendee from an institution and $1,300 for each additional attendee.  There is also an additional $350 fee to attend the “Introduction to Tax Navigator” sessions on August 5th.

Visit http://www.windstar.com/public/training_current.html for more information or to register.

Paula N. Singer, Esq. Featured as Faculty Member for AILA’s “Tax Issues for Foreign Nationals” Webcast

Paula N. Singer, Esq., along with attorney Samuel Rock, presented “Tax Issues for Foreign Nationals” for the American Immigration Lawyers Association (AILA) on May 20th.  The webcast covered a number of topics including:

• IRS and USCIS Information Sharing
• U.S. Tax Residency Rules
• Taxpayer Identification Numbers
• 1040, 1040NR and 1040X
• Dependents
• Child Tax Credit
• Earned Income Credit

An on-demand version of the webcast can be found on the AILA website at http://eo2.commpartners.com/users/aila/. 

Recently Published Articles By Paula N. Singer, Esq.

Paula N. Singer, Esq. had three articles published in major tax focused trade publications:

• “U.S. Tax Code and Treaty Solutions for Resident Aliens working Abroad,” Tax Notes International, Tax Analysts, May 5, 2008 edition
• “How Foreign Students Claim Treaty Benefits,” Corporate Business Taxation Monthly, CCH, May, 2008 edition
• “Enjoying Exemptions and Avoiding the Pitfalls of J-1 Exchange Visitor Tax Rules,” Immigration Law Today, American Immigration Lawyers Association, March/April, 2008 edition

You can view a listing of Paula N. Singer’s over forty articles by visiting http://www.windstar.com/public/paula-singer-publications.html#articles.

Windstar Will Dock at These Upcoming Trade Shows

New England Payroll Conference
Radisson Hotel
Nashua, NH
June 4 – June 6, 2008

Do not miss Paula N. Singer’s session titled “Immigration Basics for Payroll Professionals” during session one of the conference.

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National Association of College and University Business Officers (NACUBO) Annual Meeting
Hilton Chicago
Chicago, IL
July 12 - July 15, 2008

* * * * * * * * * * * * *

COKALA Nonresident Alien Tax Training
Courtyard By Marriott O'Hare
Chicago, IL
July 22 - July 23, 2008

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Check back in future issues of Crow’s Nest or visit http://www.windstar.com/public/events.html for the latest in trade show information.

©Copyright 2008 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.

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