Are Nonresident Aliens Exempt From the Loss of Personal Exemptions?

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We welcome back guest blogger Robert G. Nassau. Professor Nassau teaches at Syracuse University College of Law and directs its low income taxpayer clinic. Today he discusses a little-known tax increase that the December 2017 tax law may cause for agricultural guest workers who pay taxes as non-US residents. As a former Vermont resident I take issue with Professor Nassau’s maple syrup supremacy claims, but on a professional level I had similar experiences working with Jamaican guest workers who pick Vermont’s apples and other crops, working long, hard hours far from home to support their families in Jamaica. Any tax increase will be sorely felt by these taxpayers. Christine

Until recently, I thought I had left International Tax in my side-view mirror (“rear-view mirror” is a cliché, and I was taught to avoid those).  Back when dinosaurs roamed the Earth and I was a Big Law Tax Associate, three of my “specialties” were Eurodollar transactions, foreign tax credit maximization, and FIRPTA (don’t bother to look it up), none of which was relevant when I moved to Little Law, but all of which validated my bona fides when Syracuse University College of Law was looking for an adjunct to teach International Tax.  Years later, SUCOL had sadly dropped International Tax, but happily added a Low Income Taxpayer Clinic, which I, as the devil they knew, got to direct.  And, as they say, the rest is history.  (So much for avoiding clichés.) 

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Last year, our Clinic formed a relationship with the Legal Aid Society of Mid-New York, through which LASMNY referred to us a number of foreign “temporary agricultural workers.” These gentlemen, mostly from Jamaica, validly reside in the United States and work in our agriculture industry.  They receive H-2A Visas and have Social Security Numbers.  Some come every year; some come for two or three months; and some come for as long as six or seven months.  (For those readers whose notion of New York is Broadway and Wall Street, please note that the Empire State is #2 nationally in apple production, #2 in cabbage (think sauerkraut), #3 in pumpkins and grapes (we have over 400 wineries), and #4 in sweet corn, squash and snap beans.  We are also #1 in the world, both quantitatively and qualitatively, in maple syrup.  Take that Justin Trudeau!)   

For tax purposes, these non-U.S. citizens are classified either as resident aliens, in which case their income tax treatment is nearly identical to that of a citizen, or nonresident aliens, in which case their income tax treatment is governed by special rules in Subchapter N of the Code (Section 861 et seq.).  The definitions of resident alien and nonresident alien are set forth in Section 7701(b), which, for the holder of an H-2A Visa, looks to a formula based on days of physical presence within the United States.  By way of simple example, someone in the U.S. for 90 days a year would always be a nonresident alien (“NRA”), whereas someone in the U.S. for 150 days a year would quickly become a resident alien.   

Among the special rules governing the tax treatment of NRAs are Sections 873(a) and (b), which limit an NRA’s allowable deductions.  For tax years prior to 2018, an NRA was not allowed a standard deduction, but was allowed a personal exemption, pursuant to Section 873(b)(3), which provided – and still provides:

The deduction for personal exemptions allowed by section 151, except that only one exemption shall be allowed under section 151 unless the taxpayer is a resident of a contiguous country or is a national of the United States. 

Now comes TCJA 2018, which, as we all know, was not the poster child for precise statutory draftsmanship, but did, for tax years 2018 through 2025, eliminate personal and dependent exemptions, replacing them with a larger standard deduction and expanded child tax credit.  Or at least it did this for U.S. citizens and resident aliens.  But what about NRAs?  

Congress’ method for eliminating personal exemptions was not to repeal Section 151, but rather, in Section 151(d)(5)(A), to make the “exemption amount” zero for 2018 through 2025.  But that’s not all Congress did.  Realizing that the concepts of “dependent” and “exemption amount” had repercussions throughout the Code, Congress also enacted Section 151(d)(5)(B), which provides:

For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction, under this section. 

During 2018, the Treasury Department released some guidance regarding Section 151(d)(5)(B).  For example, in Notice 2018-70, it announced that the exemption amount should not be treated as zero for purposes of determining whether someone is one’s qualifying relative, which is relevant for the new partial child tax credit for taxpayers who do not have a qualifying child; and in Notice 2018-84, it announced similar principles for purposes of the premium tax credit and shared responsibility payment.   

But crickets regarding Section 873(b)(3) . . . until the recent publication of the tax forms used by NRAs: Form 1040NR and Form 1040NR-EZ.  In each of these Forms, the line once used for claiming personal exemptions is gone.  The IRS has not yet released Instructions for Form 1040NR, but it has for Form 1040NR-EZ, and there, under “What’s New” is the sentence: “For 2018, you cannot claim a personal exemption.” 

So, the IRS has clearly concluded that, notwithstanding Section 151(d)(5)(B), an NRA is no longer entitled to any personal exemptions.  But is that right?  The plain language of Section 151(d)(5)(B) states: “For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable or whether a taxpayer is entitled to a deduction, under this section” (emphasis added).  Certainly, Section 873(b)(3) is an “other provision of this title.”  Can’t one argue that the reduction of the exemption amount to zero is irrelevant for purposes of allowing an NRA to claim personal exemptions, because that reduction is “not to be taken into account in determining whether a deduction is allowed” for purposes of Section 873(b) (an “other provision”)? 

The only relevant Legislative History for Section 151(b)(5)(B) is found in a footnote in the TCJA Conference Report, which states:

The provision also clarifies that, for purposes of taxable years in which the personal exemption is reduced to zero, this should not alter the operation of those provisions of the Code which refer to a taxpayer allowed a deduction (or an individual with respect to whom a taxpayer is allowed a deduction) under section 151.

Section 873(b)(3) does not “refer” to a taxpayer allowed a deduction under Section 151; it actually allows the deduction.  But then, neither does the definition of qualifying relative in Section 152(d) refer to a taxpayer allowed a deduction under Section 151; rather, it refers to the exemption amount, and the Treasury Department has decided that is good enough for Section 151(d)(5)(B) purposes. 

I do not know the answer to this question of statutory interpretation, though I feel there is enough in Section 151(d)(5)(B), and not enough contrary anywhere else, to take a valid reporting position that an NRA is still entitled to a personal exemption.  But, I’m prepared to be proven wrong.   

It would, of course, have been nice if Congress had spoken more clearly on this issue by, perhaps, explicitly suspending Section 873(b)(3) for 2018 through 2025.  Or, in the alternative, Congress could have said it wanted NRAs to start paying tax from Dollar One.  Because the bottom line, if the new Form 1040NR is correct, is that a temporary agricultural worker making $7,000 during his 100 days in America in 2018 will now owe $700 in tax, rather than $285.  Is that really what Congress intended?  Is that really fair?

Comments

  1. bryan camp says:

    You may not be able to report the deduction if the form does not allow it. So the return will likely be stuck in manual processing for a long time. Worse, what do you think the chances are that someone in the Service Center will decide it’s a “Math Error”? You may be better off just filing and then, after April 15th, filing an amended return claiming the deduction. That way you can file in your local district court when the Service either denies the refund or remains silent for six months. Meanwhile, your client has received at least some refund from a return that the Service can actually process.

    • Fabrice Georis says:

      The taxpayers who are in the U.S. “two or three months” could avoid the issue by extending their stay to “one or two” months. If they consistently stay four months (or more), they would be treated as residents and entitled to the standard deduction. I suspect that a standard deduction of $12,000 would shelter all of four months worth of income of an agricultural worker.

      This may not be practical for some workers, but it could make a difference for those who are otherwise just short of meeting the substantial presence test.

  2. I love it. Great post.

  3. New York ranks first in the production of yogurt, which of course relies on agricultural products to feed the cows. I learned about nonresident aliens the same place I learned that much of what IRS does is ridiculous: In Taxpayer Service, up the street from National Office, issuing “alien tax clearances” to the occasional domestic worker or Pravda correspondent who would bother to come in and ask for one. I think I have commented previously about my efforts to repeal Section 6851(d) so I won’t bring it up again for another few years.

    Did you know that Jamaica’s standard deduction is $1.5 million? That’s in Jamaican dollars. About $11,300, American. Above that amount, the tax rate is 25%. So do United States tax payments even make a difference? I don’t do Jamaican returns, so I don’t know if they have a foreign tax credit.

    Remember, this law was not just about tax cuts, it was about jobs. Congress encouraged Jamaicans to stay longer so they would stay on the job. More hay harvested, more cows fed, more yogurt. As an alternative, they could marry a citizen and elect to be taxed on their worldwide income as a resident alien.

    It also created jobs for IRS auditors – not that any are being hired, or if hired, being paid – making sure those who game the system by claiming to be in the country for 150 days are detected. Arrival and departure dates would be easier to determine if “sailing permit” requirements were actually enforced, but rational administrators know that’s impossible.

  4. Norman Diamond says:

    ‘FIRPTA (don’t bother to look it up)’

    OK then, I’ll ask here. 26 CFR 601.101(a) says:
    “The Director, Foreign Operations District, administers the internal revenue laws applicable to taxpayers residing or doing business abroad, foreign taxpayers deriving income from sources within the United States, and taxpayers who are required to withhold tax on certain payments to nonresident aliens and foreign corporations, provided the books and records of those taxpayers are located outside the United States.”

    I wrote twice to the last known address of the Director, Foreign Operations District in Washington, D.C. The first letter was delivered and signed for, but ignored. The second letter was returned as undeliverable. Google helped me find that the role of the Director, Foreign Operations District might have been assigned to the FIRPTA unit in Philadelphia. My letter to them was delivered and signed for, but ignored. Whatever FIRPTA stands for, is it supposed to administer US revenue laws applicable to US taxpayers residing in the rest of the world?

    ‘Years later, SUCOL had sadly dropped International Tax’

    One might think a university in a border town would know better.

    ‘These gentlemen, mostly from Jamaica, validly reside in the United States’ … ‘The definitions of resident alien and nonresident alien are set forth in Section 7701(b), which, for the holder of an H-2A Visa, looks to a formula based on days of physical presence within the United States.’

    Jeez, I thought the physical presence trap only applied to visitors who DON’T reside in the US. I thought a resident would be a resident. Silly me.

    ‘Can’t one argue that the reduction of the exemption amount to zero is irrelevant for purposes of allowing an NRA to claim personal exemptions, because that reduction is “not to be taken into account in determining whether a deduction is allowed” for purposes of Section 873(b) (an “other provision”)?’

    Yes, but even this pedant has to ask, what’s the difference between being allowed an exemption of $0.00 and not being allowed an exemption of $0.00? If this clause is talking about some other kind of deduction other than the exemption, sure, that’s still allowed. I don’t think it’s talking about the standard deduction though, which isn’t available to NRAs.

    ‘Because the bottom line, if the new Form 1040NR is correct, is that a temporary agricultural worker making $7,000 during his 100 days in America in 2018 will now owe $700 in tax, rather than $285. Is that really what Congress intended? Is that really fair?’

    Those two questions are so diametrically opposed to each other, I’m amazed my computer screen didn’t implode when it displayed both at the same time.

  5. Bob Wunderle says:

    I heartily agree with the blog. My clinic specializes in H-2A tax law & prepares many resident and nonresident returns for these guest workers. For months, I have tried to get the IRS to address this issue, especially in light of the withholding instructions it published in early 2018 that exempted the first $4,150 of income earned by nonresident and dual status filers from taxation. In my clinic we intend to claim the exemption for both 1040NR and dual status resident filers. We will advise nonresident guest workers with incomes of $4,150 or less not to file except to claim a refund or taxes withheld.

  6. Rule Number One, of course, when dealing with questions like this is to check for the existence and applicability of a tax treaty. We have one with Jamaica, dating back to 1980, and the explanation of its Article 15 tells us:

    “ …remuneration derived by a resident of a Contracting State in respect of an employment may be taxed only by that State unless and to the extent that such remuneration is for employment exercised in the other Contracting State, in which case the latter State may also tax such remuneration. Even if the employment is exercised in the other Contracting State, however, such remuneration is taxable only in the person’s State of residence if his net income in the taxable year from such employment in the other State is not more than $5,000 (or its equivalent in Jamaican dollars).”

    So does this mean there is a “vanishing standard deduction” of $5,000, and workers should be advised to go home before they reach that amount?

    Do they also earn income when they return to Jamaica? If they stay in the United States long enough to “earn” resident alien status, don’t they risk being taxed on their Jamaican earnings also? And how do you determine eligibilty for LITC assistance, anyway?

  7. More about the Jamaican apple harvesters, in a 2017 article from the New York Times. Where do they pay tax on the sale of apples shipped back home?

    https://www.nytimes.com/2017/10/05/nyregion/the-jamaican-apple-pickers-of-upstate-new-york.html

    “…H-2A workers in New York make $12.38 per hour, minus federal and state taxes. The Federal Department of Labor sets the rate, which is higher than the current state minimum wage ($11) and much more than what most of them can make in Jamaica, where many work as carpenters, taxi drivers and farmers.

    “At the end of the season, many of the men also ship 55-gallon drums of goods back home to either use or sell. They get free housing at the orchard, and the Forrences run two commissaries with Jamaican chefs that serve three meals a day for $12.07. Wednesday is jerk chicken day.

    “It’s a decent living, said Neville Gray, 59, who’s been coming since 1988. ‘You take it back in your pocket, it’s yours.’ Many Jamaicans want their relatives or friends to join them. ‘I’d like to get my kid in,’ Mr. Gray said. But open spots are rare. People only really leave when they find longer gigs at other farms, or they retire.

    “…Today, there are about 3,800 Jamaican H-2A workers spread across 13 different states….The H2A program also has its critics.,,,The Southern Poverty Law Center described the guest worker program in general as ‘close to slavery.’ ”

  8. Norman Diamond says:

    I think I figured this out.

    “These gentlemen, mostly from Jamaica, validly reside in the United States and work in our agriculture industry.”

    I bet they validly VISIT the US to work as NON-RESIDENT workers. That would be how they can get trapped by the physical presence test. Residents are residents regardless of how long they’re present, but non-residents have to watch how long they don’t reside.

    (Illegal immigrants are illegal immigrants not illegal visitors because everyone who enters the US is an immigrant unless they’ve been granted permission to visit as non-immigrants. Legal immigrants are immigrants, legally. Legal visitors are non-immigrants, legally.)

    • Robert Nassau says:

      Yes, it would have been accurate to write “are legally present” rather than “validly reside.” Point taken

    • H-2A foreign guestworkers are statutorily classified as “non-immigrant”. 8 USC §1188 (i)(2)

      (2) The term “H–2A worker” means a nonimmigrant described in section 1101(a)(15)(H)(ii)(a) of this title.

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