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stefantax · May 15, 2010, 02:02 PM

Hi,

My question is whether my German annuity which would be paid out completely tax free in Germany to a German resident, will be taxed in US if I retire in US as US resident?
At the time of retirement I might be dual citizenship holder and could also spend some time in Germany if I have to in order to avoid taxation on the annuity payments. The annuity was signed and started when I was still living in Germany.

The German-US tax treaty talks about annuities:

….Under paragraph 2, annuities…which are derived and beneficially owned by a resident
of a Contracting State are taxable only in that State.

Since my case mixes two states and two residencies it is hard for me to interpret the treaty right. Any insight would be appreciated.

Thank you - Stefan

AtlantaTaxExpert · May 17, 2010, 09:10 AM

Stefan:

My read of the treaty is that the German annuity is subject ONLY to German taxes, while a U.S. annuity is subject ONLY to U.S. taxes.

This being the case, your German annuity income is FREE of U.S. taxes.

AtlantaTaxExpert · May 17, 2010, 09:28 AM

Stefan:

My read of the treaty is that the German annuity is subject ONLY to German taxes, while a U.S. annuity is subject ONLY to U.S. taxes.

This being the case, your German annuity income is FREE of U.S. taxes.

stefantax · May 17, 2010, 09:57 AM

Thanks for your answer. I just need to follow up with some details:
The annuity with a private insurance company was signed when I still was working in Germany. It was not related to actual employment but I signed up for it in addition to other government programs and employer programs. But only for 3 years I paid in with after tax money earned in Germany. Then I moved to US keeping the annuity. The rest/majority of the premiums (over 25 years) will be paid with after tax money I earned in US and transferred back to Germany. Will this change anything?
And what effect will it have if I will be living full time in US when I retire and will transfer the annuity payments to my US residence?

Thank you - Stefan

AtlantaTaxExpert · May 17, 2010, 10:08 AM

Stefan:

In my opinion, the annuity is STILL tax exempt from U.S. taxes, because it originates in Germany and would be subject to German tax laws.

The fact that the German tax laws assesses NO German income tax does not change the tax-exempt status afforded to it under the tax treaty.

stefantax · May 17, 2010, 11:26 AM

I did ask the same question on different forum and there a tax expert told me that it matters where the money was earned that is used to pay the premiums of the annuity. Here is the answer:

In short, the US can not tax you on the portion of the annuity you purchased and paid for with German earnings while you were in Germany, but IRS can, and will, tax you on the contributions you made with US money while you were living here in the US, regardless of where you live when you actually collect the annuity or what country the annuity was held in.

Above makes sense to me since otherwise any US citizen could live in Germany for a while sign such an annuity and get the same tax benefit even after they get back to US.

Stefan

AtlantaTaxExpert · May 18, 2010, 10:03 AM

Stefan:

I do not believe it matters, because the German annuity is still subject to German tax law FIRST and, under my reading of the tax treaty, would be exempt from further taxation by the United States.

That would be the stance I would take in arguing this in an IRS audit, if such an audit would happen, which, by the way, is unlikely because there would be no paper trail for the IRS to follow on the annuity itself.