[catan]

I am German and entered the US last week as a J-1 Research Scholar. In the same week I started working at a US Research Institute, where I will be employed for the next five years. In this context, I would like to ask the following three questions:

1) I am wondering what my options regarding taxes are. HR explained to me that I can (but do not have to) claim tax treaty withholding exemption on form 8233 (US-German income tax treaty, in my case: article 20(1)). My naïve question is: Does this mean that I may choose in which country (US/Germany) I am going to pay taxes for the next two years? Am I required to pay taxes only in the US, if I do not claim exemption, and am I required to pay taxes only in Germany, if I do claim exemption? And, if the answer to the latter question is yes/yes, am I right to assume that the total amount of taxes would most likely be lower in the US, i.e. if I do not claim exemption (marital status: single)?
I phoned IRS today, but unfortunately the US authorities did not have answers to these questions. Therefore I would greatly appreciate feedback regarding my tax status/options.

2) If I do not claim tax exemption, my tax situation should remain unchanged for the entire period of my five-year contract. However, if I do claim tax exemption, the exemption applies only for a period of 2 years. Does this mean I will automatically fall in the US tax system (and will have to pay only US taxes) after 2 years?

3) According to my current understanding the exemption from FICA (Social Security and Medicare taxes) is a US-specific law and unrelated to the US-German income tax treaty. Thus, am I right to conclude that I will not have to pay FICA taxes for the next two years irrespective of my decision on claiming tax treaty exemption?

Thanks very much in advance for any help or advice!

Philipp

[AtlantaTaxExpert]

1 -3) Article 20 of the U.S.-Germany Tax Treaty allows you a two-year exemption from U.S. taxes on the compensation you earn while conducting your research. That is two years from the date of your arrival. The day AFTER that two-year anniversary, your salary becomes subject to U.S. income taxes. There is NO retroactive tax provision in the 2007 revision to the tax treaty.

Further, you are exempt from FICA (Social Security and Medicare) taxes for 2010 and 2011, but become liable on 1 January 2012.

I CANNOT comment for sure as to whether you owe taxes to Germnay while being exempt in the U.S. but I believe you are NOT liable for the German taxes.

[robbikant]

Does the tax exemption also exempt me from paying New York Local or State Tax?