This article only describes the author’s personal experience when filing taxes. It is not tax advice or filing guidance. If you have questions about your own tax situation, please consult the IRS or a CPA. Thank you.
This year, Tax Day was postponed across the board to July 15; see here. That gave everyone more time to study their tax forms. Before filing, you may also want to read this roundup article:
Chinese nationals studying in the U.S. on F-1 visas who have received wages from their schools probably already know that, under Article 20(c) of the U.S.-China tax treaty, the first $5,000 of wages can be exempt from tax. This is obviously good news, and nearly every Chinese student studying in the U.S. has benefited from this treaty provision.
But here’s the question: F-1 students file as Non-Resident Aliens for five years. After those five years, does this treaty still apply? There are many conflicting answers online. A lot of people say no, arguing that it can only be used by NR filers, and that there is nowhere on Form 1040 to report a treaty benefit. But is that really the case?
The author spent six and a half years completing a chemistry PhD and became a Resident Alien after the fifth year. However, that year the school’s payroll tax system still recognized the treaty benefit: it reduced Box 1 of the W-2 by $5,000 and also issued a Form 1042-S reporting that $5,000 of income. This shows that the treaty can still apply to Chinese students on F-1 status after five years, once they become Resident Aliens. Of course, one person’s experience alone does not prove the point—we need an official source to back it up.
First, look at the U.S.-China tax treaty itself. Go to Article 20, where you can see the exemption provision.
Some readers may say: the treaty text only says that $5,000 is exempt; it does not explicitly say that the benefit still applies after you become a Resident Alien. Fair enough. But the IRS also provides a more detailed explanation of this treaty:
https://www.irs.gov/pub/irs-trty/chintech.pdf
Turn to the page explaining Article 20 and pay attention to the second paragraph. It clearly states that this treaty benefit remains available even after becoming a Resident Alien. Mystery solved!
This article is excepted from the "saving clause" of paragraph 2 of the Protocol, so its
benefits are available to persons who otherwise qualify even if they become U.S. residents.
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How much is the exemption worth?
If it’s called a $5,000 exemption, does that mean it automatically saves you $5,000 in tax? Not necessarily. Because the U.S.-China tax treaty provision applies only to students and trainees, this $5,000 exemption can only offset income earned while you were in F-1 status. If your income during your F-1 period was less than $5,000, then only your actual income during that period can be exempted.
So even if we have established that this treaty still applies after five years in F-1 status, once you become an RA, where exactly do you report it? There are several scenarios:
Scenario 1: You received a Form 1042-S
If your school or employer has a good enough payroll tax system to recognize the treaty, then the result will be this: Box 1 of your W-2 will be reduced by $5,000, and you will separately receive a Form 1042-S reporting that $5,000 of income. That reduction in W-2 Box 1 is the sign that the employer’s system recognized the treaty benefit.
If that is your situation, congratulations—you’re lucky, and the rest of this article does not apply to you. You can simply use TurboTax, TaxAct, H&R Block, or similar software to e-file the W-2 information directly. In this case, the 1042-S does not enter into the calculation; just keep it for your records.
Scenario 2: You did not receive a Form 1042-S
Your school’s or employer’s payroll tax system may be too dumb to recognize the treaty. The author personally ran into exactly this situation.
When the author went to Wake Forest University for a postdoc, the author raised this treaty issue with Payroll and got the unbelievable response: you cannot use this treaty, and you must pay tax on the full amount. The author was speechless and asked: why can a classmate with the same status use this treaty while doing a postdoc at Emory University, but I cannot use it at Wake Forest University? Is it because I’m not handsome enough? Payroll fell into silence…
Just kidding. This obviously has nothing to do with looks. Whether the treaty is recognized depends entirely on your employer’s payroll tax system. If that system is bad, you may end up in exactly this situation. Even more frustrating, according to data points reported by readers in the US Credit Card Guide community, bad payroll tax systems are actually the majority.
So if your employer does not reduce W-2 Box 1 by $5,000 and does not issue a $5,000 Form 1042-S, does that mean you really cannot get this $5,000 exemption? Fortunately, the answer is no. But to get that $5,000 exemption, you will need to spend far more brain cells than in Scenario 1. E-filing is basically off the table—you will need to use the old-school method and fill out Form 1040 manually.
In short, here is what needs to be done:
- Complete Form 1040 as usual. To claim this treaty benefit, you must use the full Form 1040, not the simplified Form 1040EZ or 1040A.
- Because Form 1040 was revised after 2019, you also need to complete Form 1040 Schedule 1: on Line 8, Other Income, write "Exemption from income: US-China Tax Treaty Art. 20 (c)" in the Description field, and enter 5000 in parentheses in the amount field. Parentheses indicate a negative number. If your F-1 period income was less than $5,000, enter the actual amount instead. Add Lines 1 through 8 of Form 1040 Schedule 1 to get the amount on Line 9, then carry that amount back to Line 7a of Form 1040.
- Complete the rest of Form 1040 normally, and use the Worksheet to calculate the tax you owe or the refund due.
- Mail the return to the address where your original Form 1040 should be filed.
You can also use tax software to add this -$5,000 income adjustment; the result is the same.
After mailing the documents, all you can do is wait for the refund. If you file early, you can generally receive the refund in about a month. (This year, the author mailed it on 3/10 and received the refund on 4/11.) If you file later and your return gets caught in the huge mailing wave around 4/15, then timing is much harder to predict. After all, the IRS office in Austin has to process refund claims for F-1 students filing 1040NR + Treaty as well as 1040 + Treaty claims, so they are probably extremely busy during that period.
Do you need to file Form 8833?
No!
Under 26 CFR § 301.6114-1(c)(1)(iv) and (c)(2), there are two relevant exceptions:
..., reporting is waived under this section with respect to any of the following return positions taken by the taxpayer:(iv) That a treaty reduces or modifies the taxation of income derived from ..., or income derived by artistes, athletes, students, trainees or teachers;
Reporting is waived for an individual if payments or income items otherwise reportable under this section (...) , received by the individual during the course of the taxable year do not exceed $10,000 in the aggregate or, ...
Both exceptions apply to this $5,000 exemption, because the treaty reduces taxation on income earned by students and trainees, and the income does not exceed $10,000 in total. So filing Form 8833 is not mandatory. In other words, you may still use TurboTax or similar tax software to file online without worrying about Form 8833.
If you found this article too late and already e-filed Form 1040 through tax software, don’t worry—you have not necessarily lost the tax benefit on that $5,000. If you filed incorrectly, you can amend with Form 1040X. You just need to redo Form 1040 according to the method above, adding the treaty benefit again (1040 + page 5 of 1040NR), then enter the difference between your original refund and your new refund on Form 1040X and mail everything to the IRS. After waiting a few months, you can still receive the refund attributable to that $5,000 exemption.
This article only describes the author’s personal experience when filing taxes. It is not tax advice or filing guidance. If you have questions about your own tax situation, please consult the IRS or a CPA. Thank you.