“EXEMPT INDIVIDUALS” AND
WHAT IT MEANS TO BE EXEMPT

by Paula Singer, Esq.

The application of U.S. federal income tax rules and the availability of income exemptions under the tax law or an income tax treaty may depend on whether a foreign national is a resident alien or a nonresident alien. A foreign national’s residency status, resident or nonresident, depends upon the individual’s immigration category and substantial presence in the United States. Generally, a foreign national who is an immigrant (a U.S. lawful permanent resident or “green card” holder) is a resident alien for income tax purposes. A nonimmigrant, who is not substantially present in the United States, is a nonresident alien.

Substantial Presence in the United States
A nonimmigrant is substantially present in the United States if the individual is present for at least 31 days in the current calendar year and the individual’s U.S. days over 3 calendar years equals or exceeds 183 days based on a formula. The 183-day formula considers all of the U.S. days in the current calendar year, plus 1/3 of the U.S. days in the prior year, plus 1/6 of the days in the year before the prior year. A nonimmigrant whose presence in the United States satisfies the substantial presence formula is a resident alien.

A nonimmigrant may fail to satisfy the 183-day formula because some or all of the individual’s U.S. days do not count for purposes of determining the individual’s U.S. residency status. For example, the following days do not count:

• Days spent in the United States for a medical condition that arose while the foreign national was in the United States
• Days commuting from a residence in Canada or Mexico to work in the United States
• A day (less than 24 hours) passing through the United States from one foreign location to another foreign location
• Days of an athlete engaged in a charitable event in the United States

For policy reasons, Congress decided that foreign nationals in the United States in the certain immigration categories should not count U.S. days for specified periods. By not counting U.S. days, the foreign national remains a nonresident alien for a longer period of time regardless of the individual’s actual days of physical presence in the United States. As a nonresident alien, the individual is subject to U.S. federal income tax only on U.S. source income and income effectively connected to a U.S. trade or business. Congress called such foreign nationals “exempt individuals.”

“Exempt Individuals”
There has probably been more confusion surrounding the term “exempt individual” than any other tax term. Exempt individuals are exempt from counting U.S. days for purposes of determining substantial presence in the United States, nothing more. They are not exempt from tax because they are exempt individuals, although such exempt individuals are frequently exempt from income and/or social security and Medicare taxes under a tax law or treaty provision.

Exempt individuals cannot claim “exempt” on line 7 of Form W-4. This is the case even if the individual is exempt from income tax under an applicable tax law or income tax treaty. A Form 8233 must be submitted for this purpose. Nor is income paid to an exempt individual exempt from information reporting, although the information form may be different. For example, employment compensation exempt from tax under an income tax treaty must be reported on an information Form 1042-S and on a Form 1042 tax return, not on a Form W-2 and a Form 941 tax return.

There are three categories of exempt individuals:

1. “Foreign-government Related Individuals,” which includes foreign nationals in “A” status (diplomats and their dependents, but not their employees) and “G” status (representatives of certain international organizations and their dependents, but not their employees).
2. “Students,” which includes foreign nationals in “F” status (academic students and their dependents) and “M” status (vocational students and their dependents) as well as “J” status students (exchange visitors in the student category and their dependents). The tax law also includes "Q" status individuals in the student category, but there are none for immigration purposes.
3. “Teachers and Trainees,” which includes non-student foreign nationals in “J” status (exchange visitors in any category except student and their dependents) and “Q” status (international cultural exchange participants and their dependents).

Each category has its own set of rules for determining when the individual’s U.S. days do not count for substantial presence purposes.

Paula Singer, Esq., CEO 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 employers on cross-border employment matters.

Watch for Volume 1, Number 4 for a discussion on “Taxation of Foreign-government Related Individuals.”

Q: I sent in a Form 1040 for last year. I just found out that as a J-1 Research Scholar in my first year here I should have sent in a Form 1040NR-EZ. What should I do?

A: As a J-1 Research Scholar in your first two calendar years in the United States, you are a nonresident alien. As a result of submitting a Form 1040, which is for U.S. citizens and resident aliens, you would have underpaid your taxes. On Form 1040, you would have claimed deductions, such as the standard deduction that you are not able to claim as a nonresident alien. Also, as a nonresident alien you can claim only one personal exemption unless you can claim additional exemptions under one of the few exceptions. You can correct the return by submitting a Form 1040X with the correct Form 1040NR-EZ attached. You should include a Form 8843, which is required for “exempt individuals.” Send the amended return, forms, and a check for any taxes due to the IRS Center in Philadelphia, PA.

Windstar Welcomes Aboard the Following New Clients:
Broward Community College
Maine Medical Center

Windstar Will Land at These Upcoming Trade Shows:

New England Payroll Conference
June 9-11, S. Portland, ME.
Paula Singer will present “Introduction to Income Tax Treaties.”

NACUBO Annual Meeting
July 17-20, Milwaukee, WI
Booth #1432
Gary Singer is moderating a panel on “Meeting the Challenges of Nonresident Alien Tax Compliance” at 10:30 am on Tuesday, July 20.

Paula Singer Weighs In On New IRS Procedures

In the March/April 2004 edition of Immigration Law Today, Paula Singer authored “IRS Tightens Controls on ITINs” for the Agency Alert section. The article focuses on the IRS’s move to tighten controls for taxpayer identification numbers (ITINs) to ensure that they are issued for the intended purpose of administering taxes.

UPCOMING NRA TRAINING

The spring NRA training session sold out!

Sign up now for the NRA Training Summer Session at the Marriott in Newton, MA from August 3-6.

©Copyright 2004 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.