ScrambleAddict

Hi all, been a while since I last posted...

I've been in the US since very early 2012 on a J1 visa, and took advantage of the dual taxation 2-year treaty exemption on income tax. This exemption has a retroactive clause - if I stay longer than 2 years on the J1 I would have to pay two years of back taxes (and interest and penalties). Before the 2 year mark I will then have to leave on the J1 to not activate this clause.

Now, I have read that if I leave and come back on a different visa (e.g. H1B) it is possible that the retroactive clause does not apply, even on the same job. I have read as much as I can on this (including previous posts by Caleyjag, http://britishexpats.com/forum/showthread.php?t=563457), but I cannot find any clear advice - it is not anywhere on the IRS site. I have now been to both an <well known online tax adviser> as well as <well known national tax return preparing office>, and both have said to me that it is possible to do this with a J1->H1B.

Neither of these companies were prepared to give something in writing. I wanted to know if anyone had any more information. The idea still seems risky! Is there something that I am unaware of?

ian-mstm

Was Peter Newton your "well known online tax adviser"? If he wasn't, I suggest you contact him.

Ian

ScrambleAddict

Actually it wasn't! I will contact him shortly. Thanks!

galda

Hi there,
I'm actually trying to research the same topic.
Which article of the treaty are you using btw?
It seems that once you left the US within the first 2 years on J1, obtained H1B and soon came back to the US on a new status, you should be fine... But I am not sure what to do should the IRS officer decide otherwise. Where does it say that the change of your non-immigrant status from J1 to H1B should affect the treaty? It does make your days countable towards substantial presence from the first day you land on a H1B visa, unlike your first 2 (calendar) years on a J1. But the question is still open.
Try emailing IRS Email Tax Law Assistance (http://www.irs.gov/uac/Help-With-Tax-Questions-2) and post your results here. I'll do the same when I hear from them.

Cheers,
Alex

galda

Here's what I got as a reply from IRS:

Your Question Was:

Dear Madam Sir,
I have a question regarding the UK-US tax treaty for researchers teachers (Article 20). I am currently employed by the University of Chicago as a postdoctoral researcher, it's my 2nd year of employment on this J1 visa (2 year rule does not apply). As a British citizen, I had a choice to use the tax treaty between the US and UK in order to avoid double taxation. I, however, declined it, since I was not sure how long I would be staying in the US for. My employer intends to renew my contract for several more years and offered to sponsor my H1B visa starting for my 3rd year of employment. Provided my immigration status changes from J1 to H1B within these first 2 years in the US, will I be able to claim the treaty benefits for the time I spend on J1 visa and claim back the IL and federal taxes for that period?
My main concern here is about the 2 year retroactive clause of the treaty..

Best regards,
MR X

The Answer To Your Question Is:

According to our reading of Article 20A of The U.S UK tax treaty, as presented in the technical explanation, the exemption from U.S. tax lasts for two years from the date you come to the U.S. as a researcher. If you then stay in the U.S. for longer than two years you lose that exemption from tax retroactively. Changing your visa status from J-1 to H-1B does not in any way affect the two year exemption or the retroactive loss of the exemption.
It appears then that you will not be able to claim those treaty benefits for the first two years in the U.S. because your stay will exceed the two year limit.

bewildering

Officially you have to file a 1040X to amend your tax returns from the last two years. The trick is knowing how much to pay, whether you were a NR or R etc. The good news is that you will not be penalized. the bad news is that I hope you took the advice you were given, and didn't spend the untaxed money.

Usually, it won't be that much money, your salary was not huge as a postdoc. I am guessing around 20% rate if you are an NIH postdoc? But i could be wrong and it depends when you started your first 'tax' year.

You also need to realize that the IRS employs very few people, and you are the bottom rung of their interest level. They won't be able, or willing to help you. I tried to read the UK-US tax treaty and I can't say I blame them.

Also, tax preparers in the US will be of no help. I initially tried them, the person with whom i talked was astounded by my return with all the zeroes as "she had never seen that before".

ScrambleAddict

Update: the IRS have said to me pretty much what they said to galda. Even if you physically leave and come back a short time later for research the retroactive clause is triggered. I then went back to <well known tax return preparing office> with the email from the IRS, and they did a bit more research and changed their advice to be in line with the IRS statement.

It seems that the time delay between visits must be in general one whole year (or, to the point, enough to reestablish residency in the UK in the eyes of the IRS). Judging from Caleyjag's old posts though, it might be possible to come back sooner than this for purposes other than research/teaching.

To be honest I probably won't come back knowing this. My advisor had only enough money for me for 5 more months, which made it not worth it including the retroactive tax costs.

Cook_County

You are getting muddled between the substantial presence test and the treaty. Re-think the question!

ScrambleAddict

Hi Cook County, could you be a bit more specific? I have spent many, many days researching this and am at an impasse on alternatives.