How to Claim a Tax Treaty Benefit

These instructions are an adapted version of "Self-Help Tax Program: How to Claim a Student Tax Treaty Benefit," courtesy of James Fine, International Affairs, University of Pennsylvania. UO students and scholars are encouraged to go to IA-sponsored Tax Workshops.

For more information, please refer to IRS Publication 901: U.S. Tax Treaties

This supplemental information sheet is for international students and scholars who are entitled to the benefit of a tax treaty to reduce or eliminate their 2006 Federal income taxes (except Indian students who should refer instead to Information for Indian Students about the U.S.-India Tax Treaty and Canadians who should refer instead to Information about the U.S.-Canada Tax Treaty.

Step One: Review the Type of Income You Had in 2006

To correctly claim most tax treaty benefits you must be certain of the type or types of income that you had in 2006. Review your answers to the question, "Did I have taxable income in 2006?" on pages 1 and 2 of your General Tax Information Sheet for International Students and Scholars. Be careful to distinguish non-service scholarship income from earned income. Earned income includes the stipend portions of most University teaching assistantships and research assistantships. Non-service scholarship or fellowship income includes the stipend portions of athletic scholarships.

All earned income should be reported to you on Form W-2 with one important exception: income covered by a current tax treaty. Treaty-exempt income should be reported to you on Form 1042-S. The amount of earned income exempt from U.S. income tax under different student tax treaties ranges from $2,000 to $5,000 per year.

You should receive Form(s) W-2 from the University or other employer(s) by January 31, 2007 and Form(s) 1042-S from the University or other grantor(s) by March 15, 2007. If you think the University made a mistake in reporting your stipend income on Form W-2 or Form 1042-S discuss your situation with your departmental business administrator. If a mistake was made, ask the University to correct the mistake by providing you with amended forms. The University reports the information on your W-2 and 1042-S directly to the Internal Revenue Service. Your federal income tax return should agree with the information provided to IRS by the University.

Step Two: Review Your Treaty Benefits

In most cases, tax treaties benefit students and scholars by allowing them to exempt all of their non-service scholarship or fellowship income and an amount of their earned income from federal taxation. (That's why it's so important to distinguish correctly between non-service scholarship income from earned income.)

Is there a tax treaty between my country and the United States that can save me money on my Federal income taxes? Go to IRS Publication 901, TABLE 3 for a list of tax treaties.

The countries listed in Table 3 have tax treaties with the United States that include substantial benefits for students and scholars. Check the list to see if your country appears and note any benefits to which you are entitled. You are generally entitled to these tax treaty benefits for the same period that you usually remain a non-resident for Federal income tax purposes.

If you have identified that you have a tax treaty, and you have a Form 1042-S, go to IRS Publication 901, TABLE 2 for important treaty benefit details.

How to read Table 2

Step Three: Claim Your Treaty Benefits on Form 1040NR-EZ or Form 1040NR

If you are using Form 1040NR-EZ:

Bullet-point 1) Turn to page 2, Item J of Form 1040NR-EZ and write the name of the country whose tax treaty benefit you are claiming on the first line of Item J.

Bullet-point 2) On the second line of Item J that begins "Type and amount of income exempt from tax..." write in the space provided for 2006 the amount(s) exempt under treaty.

Make separate entries for any non-service scholarship income and any amount of earned income exempt under treaty. Be sure to include the correct tax treaty article or articles. (For example, if your scholarship stipend was $9,000 and you also had $2,000 of earned income that was exempt under treaty write "$9,000 non-service scholarship stipend, Article __; $2,000 earned income, Article __.")

Bullet-point 3) If you also claimed the benefit of a tax treaty in 2005, write the treaty article number(s) you claimed in 2005 on the following line.

Bullet-point 4) Answer the question "Were you subject to tax in that country on any of the income that you claim is entitled to the treaty benefits?" (Even if, as in most cases, your answer is "no," this does not affect your entitlement to the treaty benefit.)

Step 1: Total the amounts of treaty-exempt income you've listed in Item J, turn back to page 1 of the 1040NR-EZ and write this total on Line 6.

Step 2: On page 1, Line 3, of your 1040NR-EZ ("Wages, salaries, tips, etc.") enter your total earned income minus the amount of your earned income that is exempt under treaty.

For example, if you earned $12,600 as a teaching assistant in 2006 and had a treaty benefit allowing you to exempt $2,000 of your earned income, your Form W-2 should have $10,600 reported in Box 1; the $2,000 of treaty-exempt income should be reported as a separate item on your Form 1042-S. You should enter $10,600 on Line 3 and include the remaining $2,000 in your total income exempt by a treaty on Line 6. But please be careful: make sure your treaty-exempt earned income has actually been subtracted from Box 1 on your W-2 and added to your 1042-S. If it has not, you must subtract it from the amount in Box 1 on your W-2 yourself and enter the remainder on Line 3. This may be common if you have W-2s from employers outside the University of Oregon.

If you had no earned income in 2006, or if your earned income was less than the amount exempt under treaty, enter a "0" on Line 3.

Step 3: On page 1, Line 5, of your 1040NR-EZ ("Scholarship and fellowship grants. Attach explanation") enter a "0" if you had a non-service scholarship or fellowship stipend that was exempt under the tax treaty with your country. (You should have already included the amount of this stipend in the total income exempt by a treaty that you wrote on Line 6.)

While IRS may accept Form 1042-S by itself as the required explanation, it's a good idea to also attach a letter explaining your scholarship, such as a copy of your scholarship award letter from your department. If you do not have and cannot obtain a copy of this letter, ask your department to write a letter specifying the nature of your scholarship).

If you had no scholarship or fellowship income in 2006 simply leave Line 5 blank.

Step 4: Add lines 3, 4, and 5 and enter the total on line 7.

Step 5: To find your adjusted gross income, subtract the sum of line 8 and 9 from line 7.

Step 6: To complete your 1040NR-EZ, proceed with the instructions for 1040NR-EZ.

If you are using Form 1040NR:

Step 1: Go to page five, Item M, of your 2006 Form 1040NR, "U.S. Nonresident Alien Income Tax Return." On the first line in Item M write the name of your country, whose tax treaty with the U.S. you are claiming.

Step 2: On the next line in Item M (which begins "Type and amount of effectively connected income exempt from tax...") make separate entries for any non-service scholarship income and any amount of earned income exempt under treaty. Be sure to include the correct tax treaty article or articles. (For example, if your scholarship stipend was $9,000 and you also had $2,000 of earned income that was exempt under treaty write "$9,000 non-service scholarship stipend, Article ___; $2,000 earned income, Article ___.")

If you also claimed the benefit of a tax treaty in 2005, write the treaty article number(s) you claimed in 2005 on the following line.

Disregard the next line in Item M which begins "Type and amount of income not effectively connected..."

Step 3: Answer the two questions that end Item M: "Were you subject to tax in that [your] country on any of the income you claim is entitled to the treaty benefits?" (Even if, as in most cases, your answer is "no," this does not affect your entitlement to the treaty benefit.)

The answer to the second question ("Did you have a permanent establishment or fixed base... in the United States...") is "no" unless you own a business that is based in the U.S. (If you own a U.S.-based business you should seek professional tax assistance to correctly meet your 2006 U.S. income tax obligations.)

Step 4: Turn to page 1, Line 22 of your 2006 1040NR. Line 22 instructs you to "Enter Total income exempt by a treaty from page 5, Item M." As directed, write on Line 22 the total amount of your income that is exempt under treaty. Add together any exempt non-service scholarship stipend plus the amount of your earned income that is exempt.

Step 5: On page 1, Line 8, of your 1040NR ("Wages, salaries, tips, etc.") enter your total earned income minus the amount of your earned income that is exempt under treaty.

For example, if you earned $12,600 as a teaching assistant in 2006 and had a treaty benefit allowing you to exempt $2,000 of your earned income, your Form W-2 should have $10,600 reported in Box 1; the $2,000 of treaty-exempt income should be reported as a separate item on your Form 1042-S. You should enter $10,600 on Line 8 and include the remaining $2,000 in your total income exempt by a treaty on Line 22. But please be careful: make sure your treaty-exempt earned income has actually been subtracted from Box 1 on your W-2 and added to your 1042-S. If it has not, you must subtract it from the amount in Box 1 on your W-2 yourself and enter the remainder on Line 8. This may be common if you have W-2s from employers outside the University of Oregon.

If you had no earned income in 2006, or if your earned income was less than the amount exempt under treaty, enter "0" on Line 8.

Step 6: On page 1, Line 12, of your 1040NR ("Scholarship and fellowship grants. Attach Form(s) 1042-S...") enter a "0" if you had a non-service scholarship or fellowship that was exempt under the tax treaty with your country. (You should have already included this amount in the total income exempt by a treaty that you wrote on Line 22.)

While IRS may accept your Form 1042-S by itself as the required explanation, it's a good idea to also attach a letter explaining your scholarship (such as a copy of your scholarship award letter from your department; if you do not have and cannot obtain a copy of this letter, ask your department to write a letter specifying the nature of your scholarship).

If you had no scholarship or fellowship income in 2006 simply leave Line 12 blank.

Step 7: To complete your 1040NR, proceed with the Instructions for Form 1040NR.

Special Section for Students from Barbados, Hungary, and Jamaica

The U.S. tax treaties with Barbados, Hungary, and Jamaica allow students to file a U.S. resident tax return if they choose instead of the nonresident return. The advantage of filing a resident return is that you can claim personal exemptions for dependent family members ($3,300 each in 2006) and take the standard deduction. You will pay substantially less U.S. income tax on your U.S. income as a result. However, there are two disadvantages of filing a resident return: 1) your worldwide income (if you had any) becomes subject to U.S. income tax and 2) your U.S. source income - except income that you earn at the University during the school year - becomes subject to social security and Medicare taxes (about 8% of your earnings). You may need to calculate your overall taxes as both a nonresident and a resident to determine which filing status is better for you. If you decide to file as a resident taxpayer, file Form 1078, in which you declare your intention to be treated as a resident taxpayer, and attach it to your Form 1040EZ or 1040.)