More problems with 1042-S

You have partially misinterpreted the definition of two years. The exemption from the substantial presence is for two calendar years. If you entered the US in August, 2002, then calendar year 2002 is your first year and 2003 is your second year. You would start to count days of presence starting on 1/1/04. That makes you a resident for tax purposes in 2004. Treaties usually have a savings clause that allows the country in which you are a resident to tax you regardless of the treaty benefit. The Israeli treaty has a clause that specifically exempts teachers, students, scholars, etc from the savings clause. Therefore, the two year income exemption starting from the arrival date in 2002, would be applicable to you. Any income paid to you by the school for your personal services up until your two year period ended in Aug. 2004 would be exempt from taxation. You could exclude that amount of wages from Line 7 of the tax form. As you are a resident alien in 2004, you must complete Form 8833 (Treaty Based Return Provision) to explain why you excluded the wages. You would need to cite the paragraph and article number in the treaty that provides the two year exclusion (I assume Para 1 of Article 23) and Paragraph 4(b) of Article 6 that provides the exemption from the savings clause.

-- Alan