Taxation of alien individuals by immigration status – J-1

The substantial presence test is a mechanical test based on counting a nonimmigrant alien’s days of physical presence in the United States under a 3-year “look-back” formula. For purposes of this 183-day test, any part of a day that a nonimmigrant alien is physically present in the United States is counted as a day of presence. There are exceptions to this rule where certain days of physical presence in the United States do not count, including days a nonimmigrant alien is considered an “exempt individual.” Generally, a J-1 alien who spends 122 days in the United States in each year of the 3-year period will meet the substantial presence test for the current calendar year and be considered a U.S. resident. For details on the 3-year look-back formula refer to substantial presence test.

Exempt individual

The term “exempt individual” does not refer to someone exempt from U.S. tax but rather to a certain category of individual whose days of physical presence in the United States do not count for purposes of the substantial presence test. Included within this category are students, teachers, and trainees.

The term “student” refers to any alien individual (and that individual’s immediate family) who is admitted temporarily to the United States on an “F” or “M” visa or as a student on a "J” or "Q" visa, and who substantially complies with the requirements of that visa.

The term “teacher or trainee” refers to any individual (and that individual’s immediate family), other than a student, who is admitted temporarily to the United States on a “J” or “Q” visa, and who substantially complies with the requirements of that visa. In general, the term includes any alien individual present in the United States on a "J" or "Q" visa for a purpose other than studying. For example, alien physicians, au pairs, short-term scholars, and summer camp workers in "J" visa status; and cultural exchange visitors in "Q" status are all within the definition of “teacher or trainee”.

There is a limit on the number of years a J-1 alien can be considered an “exempt individual” student, teacher, or trainee and exclude U.S. days of presence for purposes of the substantial presence test. The time limit depends on whether the J-1 alien entered the United States as a “student” for the purpose of studying at an academic or vocational institution or as a “teacher or trainee” for the purpose of teaching, conducting research, or receiving on the job training.

1. Student – five calendar year rule:
   A J-1 alien can exclude U.S. days of presence as a “student” for purposes of the substantial presence test for up to five calendar years. The five-year limit is a lifetime limit that can’t be renewed but may be extended if certain conditions are met. For detail information, see exempt individual - who is a student.
    
2. Teacher or trainee – two calendar year rule:
    
   • Generally, a J-1 alien cannot exclude U.S. day of presence as a “teacher or trainee” for more than two calendar years.
     • Four year exception: Subject to certain conditions, the two-year teacher or trainee limit can be extended up to four calendar years.
        
     However, unlike the student limit which is a lifetime limit, the teacher or trainee limit can be renewed. For detailed information, see exempt individuals in teachers and trainees.
     
     For examples of the application of the tax residency rules in various situations involving students, teachers, and trainees, see alien residency examples.

Closer connection exception to U.S. residence

A J-1 alien who otherwise meets the substantial presence test can nevertheless be treated as a nonresident for U.S. income tax purposes by satisfying the “closer connection” exception to the substantial presence test. See conditions for a closer connection to a foreign country.

If a J-1 alien meets the substantial presence test, he or she should be aware of the rules for determining the official starting and ending date of their period of residency in the United States. For details on these rules, refer to residency starting and ending dates.

A J-1 alien who is a U.S. resident alien under the substantial presence test and who is also a resident of his or her home country under that country’s internal tax laws is known as a “dual resident taxpayer.” United States income tax treaties contain “tie-breaker rules” that apply to determine a single country of residence for purposes of applying the income tax treaty and calculating income tax liability in situations where an individual would otherwise be treated as a resident of both the United States and the other country, resulting in potential double taxation. J-1 aliens who claim treatment as residents of another country under the “tie-breaker rules” of a U.S. income tax treaty are treated as nonresident aliens for purposes of calculating their U.S. income tax liability and must file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). However, for purposes other than calculating their income tax liability (including for purposes of certain information reporting), J-1 aliens are treated as resident aliens under the Internal Revenue Code. For example, in determining whether a foreign corporation is a controlled foreign corporation under section 957 of the Internal Revenue Code, a J-1 alien is still considered a U.S. resident (i.e., a U.S. person).

J-1 aliens who are residents of the United States under the “tie-breaker rules” of a U.S. income tax treaty will be treated as U.S. residents for purposes of the tax treaty and will be subject to the “saving clause” in the treaty, resulting in the unavailability of certain benefits under the applicable tax treaty. However, a tax treaty provision may have an exception to the saving clause, which allows a J-1 alien to continue to claim certain treaty benefits even after becoming a U.S. resident alien for tax purposes.

Generally, wages earned by a nonresident alien while working in the United States are subject to U.S. taxation regardless of who is the payor/employer. However, for J-1 aliens who receive compensation from a foreign employer, that income is exempt from U.S. taxation under Section 872(b)(3) of the Internal Revenue Code. Once the J-1 alien becomes a resident alien, this exemption will no longer apply.

The United States has bilateral income tax treaties with over 65 countries and many treaties provide specific benefits for J-1 aliens under the students/trainees article and/or the teachers/researchers article of the applicable treaty. Each treaty provision is unique and must be examined to determine the applicable treaty benefits for J-1 teachers, researchers, trainees, and students. These types of treaty benefits, which may exempt certain income from U.S. tax, generally apply only for a specified period of time, usually 4 to 5 years from the date of entry for students and trainees, and 2 to 3 years from the date of entry for teachers and researchers. There are also other treaty provisions (e.g., independent and dependent personal services, teacher/researcher, and student/trainee articles) that may be applicable to J-1 aliens.

For more information, please refer to:

• Publication 901, U.S. Tax Treaties
• United States income tax treaties – A to Z
• Claiming tax treaty benefits

If a J-1 alien is not a U.S. resident alien under the rules described above under “Tax Residency Status,” he or she is a nonresident alien for U.S. tax purposes. The J-1 alien’s employer must withhold on his or her wages following the special rules in Chapter 9 of Publication 15, (Circular E), Employer’s Tax Guide. The J-1 visa holder should file a Form W-4, Employee’s Withholding Allowance Certificate, according to those same rules.

If the J-1 alien is a U.S. resident alien, the employer must withhold U.S. federal income tax on the employee’s wages in the same manner as one would withhold on wages paid to a U.S. citizen in the same situation (i.e., with the same marital status and number of exemptions). The J-1 alien should file a Form W-4.

Please refer to paragraph F, Withholding under income tax treaties, below for more information regarding applicable treaty provisions effects on withholding. Please refer to Publication 15 for more information regarding employer withholding of U.S. federal incomes taxes on wages.

Special Social Security and Medicare tax exemption: A J-1 alien who is a nonresident alien for tax purposes and is paid wages in exchange for personal services performed within the United States is exempt from paying U.S. Social Security and Medicare taxes on such wages under Section 3121(b)(19) of the Internal Revenue Code, as long as the employment is authorized by USCIS and the services are performed to carry out the purposes for which the J-1 visa was issued to them.

J-1 aliens who become U.S. tax residents or change their visa status to other work visa types (other than F, M or Q visa) are subject to Social Security and Medicare taxes on their wages. However, if a J-1 alien is from a foreign country with which the United States has entered into a totalization agreement, he or she may claim an exemption from U.S. Social Security and Medicare taxes by securing a Certificate of Coverage from the social security agency of his or her home country and presenting such Certificate of Coverage to his or her employer in the United States, according to the procedures set forth in Revenue Procedures 80-56, 84-54, and Revenue Ruling 92-9. An alternate procedure is provided in these revenue procedures for an alien who is unable to secure a Certificate of Coverage from his or her home country. For more information, see Social Security/Medicare and Self-Employment tax liability of foreign students, scholars, teachers, researchers, and trainees.

What to do if the tax is withheld: If a J-1 alien falls into the category of employees who are exempt from Social Security and Medicare tax, he or she may discuss with his or her employer to stop withholding and refund amounts that were already withheld. Employees that are unable to obtain a refund from their employer may file Form 843, Claim for Refund and Request for Abatement and Form 8316, Information Regarding Request for Refund of Social Security Tax Erroneously Withheld on Wages Received by a Nonresident Alien on an F, J, or M Type Visa PDF, to obtain a refund.

The wages paid to a J-1 alien who is a nonresident alien in exchange for personal services performed within the United States are exempt from U.S. federal unemployment tax (FUTA tax). On the other hand, if the J-1 alien becomes a resident alien for U.S. tax purposes, wages received are subject to FUTA tax under the same conditions that would apply to U.S. citizens.

For more information, please refer to:

• Aliens employed in the U.S. - FUTA
• Publication 15, (Circular E), Employer’s Tax Guide

Wages paid to a J-1 alien are reported on Form 941, Employer's Quarterly Federal Tax Return, and Form W-2, Wage and Tax Statement, in the usual manner. However, if the J-1 alien is claiming treaty benefits with respect to wages, as a resident of a country with which the United States has an income tax treaty in force, such wages are reported on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding.

If the J-1 alien is a nonresident alien, payments other than wages, such as interest, dividends, rents, royalties, or non-employee compensation are subject to gross basis withholding of U.S. federal income tax at the rate of 30%, unless he or she is eligible for a lower rate of tax under an income tax treaty. Such payments are reportable to the IRS on Forms 1042 and 1042-S.

If the J-1 alien is a U.S. resident alien, payments other than wages, such as interest, dividends, rents, royalties, and non-employee compensation are not subject to withholding of U.S. federal income tax. However, backup withholding at the rate of 28% must be applied to the payment(s) if the J-1 alien failed to report his or her U.S. Taxpayer Identification Number (TIN) to the payor of the income. A TIN for a J-1 alien is a U.S. Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). Such payments are reportable to the IRS on Form 1099-MISC, Miscellaneous Income, and on Form 945, Annual Return of Withheld Federal Income Tax, if backup withholding applies.

If the J-1 alien is treated for U.S. income tax purposes as a resident of a country with which the United States has an income tax treaty, he or she may benefit from a reduced rate of U.S. federal income tax on certain types of U.S. source income. For treaty benefits involving personal services income, the J-1 alien should submit a signed Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, to the payor of the income. For treaty exemptions involving types of income other than personal services income, the J-1 alien should submit a Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to the payor of the income. Such income is reported to the IRS on Forms 1042 and 1042-S by the payor of the income after the end of the year.

Note: J-1 aliens who do not timely submit the Form 8233 and/or Form W-8BEN to claim treaty benefits for purposes of an exemption or reduced rate of withholding from the payor of income may still claim the treaty benefits when filing their individual U.S. income tax return. Please refer to the Form 1040-NR, Schedule OI, Instructions for more details.

For more information, please refer to:

• Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
• Publication 901, U.S. Tax Treaties
• United States income tax treaties – A to Z

J-1 aliens who are nonresident aliens on the last day of the taxable year generally must report their U.S.-source fixed, determinable, annual, or periodical (FDAP) income (e.g., compensation earned from working in the United States) and income effectively connected with a U.S. trade or business (ECI) on Form 1040-NR, U.S. Nonresident Alien Income Tax Return. For details on these rules, refer to taxation of nonresident aliens.

If claiming treaty benefits, J-1 aliens must report both the income and the treaty benefit on Form 1040-NR, with Form 8833 (if required). Please refer to claiming tax treaty benefits.

If a J-1 alien qualifies to exclude days of presence as either a “student” or a “teacher or trainee,” he or she must attach a fully completed Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition to their income tax return. If no return is required to be filed, Form 8843 must be mailed separately to the IRS at the address indicated in the General Instructions by the due date for filing Form 1040-NR.

J-1 aliens who are U.S. resident aliens for the entire taxable year must report their entire worldwide income on Form 1040, U.S. Individual Income Tax Return, in the same manner as if they were U.S. citizens. If they also paid foreign income tax on foreign-source income, they may be eligible for foreign tax credits.

For more information, please refer to:

• Taxation of resident aliens
• Publication 519, U.S. Tax Guide for Aliens
• Publication 514, Foreign Tax Credit for Individuals

A dual-status alien is an individual who changes residency status during the tax year from nonresident alien to resident alien or resident alien to nonresident alien. J-1 aliens who are “dual-status aliens” must file a special income tax return. For more information, refer to taxation of dual-status aliens.

A dual status J-1 alien married on the last day of the taxable year to a U.S. citizen or to a resident alien may elect with his or her spouse to file a joint Form 1040 return as if the J-1 visa holder was a U.S. resident alien for the entire tax year. For more information, refer to nonresident spouse treated as a resident. If they also paid foreign income tax on foreign-source income, they may be eligible for foreign tax credits (refer to Publication 514, Foreign Tax Credit for Individuals).