Hi,

I am a fulltime J-1 graduate student from Germany and currently in my second year. I worked as a graduate assistant (both research and teaching, 7 and 5 months respectively) throughout 2016.
I'm in the process of preparing my 2016 return (I'm filing 1040NR-EZ). I will have to pay more taxes since not enough taxes were withheld from my salary (this was an error on my side in my W-4). Because this is quite a huge amount, I was looking into tax treaties and came across Article 20(4). It is my understanding that my assistantship may be regarded as compensation for personal services during study. Under Article 20(4) I would be able to exempt $9,000.

https://www.irs.gov/PUP/individuals/international/Tax_Treaty_Table_2.pdf

I have a few questions in this regard:

1) Can I claim this treaty? In publication 901 it says that the compensation must be supplementing other funds for education, maintenance or training. What constitutes those other funds?

2) The exemption is only valid for a total stay of max. 4 years. If I were to stay longer (which I do not know at this point), according to publication 901, all exemptions would be invalid in retrospect. What would happen in that case? Of course I understand that I will need to pay taxes on those exempt $9,000 with an amended 1040NR-EZ for 2016, but will there be an additional penalty and interest? It is my understanding that in this case I underpayed my estimated taxes and according to the instructions for 1040NR-EZ this faces a penalty. If this was the case, is there a way to estimate how much that would be?

Thank you very much for your help.

First, based on what you have posted, you CAN claim the $9,000 treaty exemption.

If you stay beyond the four period, you will have to amend the return and "unclaim" the treaty exemption. When that happens, the IRS usually (but NOT always) waives all penalties and interest.

Dear AtlantaTaxExpert,

Thank you very much for your answer!

I'm mostly concerned with that "supplementing other funds" part, which is absent from the same exemption for salary compensation for students from other EU countries (like Belgium or France). My assistantship positions were my only income (but over $9,000, of course), hence available funds, during that year and thus fully paid for my "education" and "maintenance" (as I otherwise would not have been able to actually live where I am and study - I wouldn't even have gotten my J-1 visa, as it is tied to funding). I got a tuition waiver through those two positions - which wouldn't have been available otherwise. The only further thing I got was a very small scholarship of $500, which would not have been anywhere close to being enough to pay for my studies. That's why I was wondering what constitutes that passage and what those "additional funds" would be. Or would/could those be the remaining wages after the $9,000 exemption eventhough they still come from the same dependent personal services?

Page 21, middle column at the bottom: https://www.irs.gov/pub/irs-pdf/p901.pdf

In the instance I were to stay longer (which is likely, but as I said I don't know for certain at this point) and the IRS does not waive the penalties and interest, is there any way to get an idea of how much that would be (like ballpark idea)? I'm not quite sure I understand the penalty section in the 1040NR-EZ instructions.

Again, thank you very much!

Also, if I exempt the $9,000, I have to pay tax on those in Germany, right?

I cannot answer that, as I do not practice in Germany

Thank you, I found out by now that I do not have to pay taxes on this in Germany.

I have, however, come across another problem. I did not exempt the $9,000 on my wages by filing 8233. Is there any way to exempt them for 2016 on my 2016 tax return, now? On form 1040NR-EZ I am asked about the amount exempt through a treaty, but nowhere can I deduct it. Am I missing something?

Thank you very much!

You do NOT have to file Form 8233 to claim the exemption. You just debit your W-2 wages by $9,000 on Line #8 of Form 1040NR and enter the $9,000 exemption amount on Line #22 of Form 1040NR, then explain WHY you are exempting $9,000 on the Schedule OI on Item L1.

If you think you need professional help on this, this IS what I do, so email me at the email address in my profile.

Thank you very much for the answer and also the offer - I think I'm still fine (but will come back to your offer if necessary, eventually).

I think my initial post may not have been completely clear. It could have read as "I made $9000 total through my assistantship that I now want to exempt".

However, I made a total of 20k from both my assistantships = dependent personal services of which I want to exempt 9k. But, I did not have any other funds besides those assistantship.

This brings me back to a part of my original question: what constitutes those other funds article 20(4) is talking about and how do I have to show them?

You do NOT have to show them, at least not unless specifically asked, which is not likely.

Thank you, but given this better explanation of my situation, do you still think I CAN use the tax treaty?

Oh, yes, for sure. If I were preparing your return, I would without a doubt claim the treaty exemption.