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Harvard · Mar 24, 2009, 11:10 AM

I am a postdoctoral research fellow at Harvard. I am on a J1 visa and I entered the US a little more than 2 years ago. Filing my taxes for 2007, I thought I wouldn't stay longer than 2 years therefore I claimed the tax exempt and the state returned all federal taxes to me that I had paid up until that date.
Now I am filing my taxes for 2008 and I know that I extended my 2 years stay in the US. My question is: Do I have to tell the IRS: looks guys, you returned the taxes I've paid in 2007 but I ended up staying longer and I know that the entire tax treaty exemption is lost and I have to pay them back?
IF so, how would I do that? Is there a form to fill in? I was looking for it and I couldn't find it. The university doesn't provide any tax consultation and I don't want to be fined by the IRS for keeping the money.

I appreciate any help

MukatA · Mar 24, 2009, 12:47 PM

For Germany the exemption from federal income tax is for two years. The exemption is lost for entire visit unless the competent authorities of Germany and the United States agree otherwise.

You should get answer from AtlantaTaxExpert.

AtlantaTaxExpert · Mar 25, 2009, 08:32 AM

Harvard:

You have two options.

1) You can file your ask for an exemption of the retroactive tax provision with the IRS. I would need to know more about the circumstance surrounding your extended stay before commenting on the merits of that request. A similar request would likely be submitted to the German tax authorities to get their concurrence.

2) You can pay the 2007 taxes by amending your 2007 return with a Form 1040X and a properly-prepared Form 1040NR or 1040NR-EZ.

iwanuschka · Apr 4, 2009, 01:57 PM

I visited a tax seminar at Harvard just a few weeks ago where I was told that the retroactive loss of the treaty benefits with Germany in case a J1 research scholar stays longer than two years was changed in 2007!

Please see attachment article 20.

My question is - how often can I calim the tax treaty? If I have claimed it in 2003 and established residency in Germany between - can I claim it now again?

Thanks, Stefan

AtlantaTaxExpert · Jun 3, 2009, 11:15 AM

Iwanuschka identified a change to the Tax Treaty that I was not aware of at the time of my 25 Mar 09 posting, which is that the retroactive tax clause in the U.S.-German Tax Treaty has been deleted!

This means that Harvard can claim the income tax exemption for 2008 and not worry about paying thise taxes back for 2007 and 2008 if he stays beyond two years.

Lucky him! :-)

salvochi · Jun 15, 2009, 08:13 AM

Hallo
The "2 years" (cfr art 20(1)) mentioned by Mukata seem to be important only in certain cases. According to art. 20 (3), if Harvard got an award (e.g. fellowship) or a post-doc grant (typical case for a postdoc who is neither a teacher nor a professor) there seems to be no time limit for claiming tax exemption... did I get it completely wrong?

Thanks in advance for your answer

AtlantaTaxExpert · Jun 15, 2009, 09:21 AM

When dealing with tax returns, there is ALWAYS a three-year statute of limitations in claiming exemptions, deductions, etc. on a tax return.

After the passing of that three-year period, any amendment or filing that results in a refund will be rejected by the IRS as a matter of law.

salvochi · Jun 15, 2009, 09:43 AM

Originally Posted by AtlantaTaxExpert

When dealing with tax returns, there is ALWAYS a three-year statute of limitations in claiming exemptions, deductions, etc. on a tax return.

After the passing of that three-year period, any amendment or filing that results in a refund will be rejected by the IRS as a matter of law.

Thanks for the answer and sorry for the misunderstanding: the "2 years" refer to the total stay of the German resident in the US, and not to the deadline for filing the application.

According to MukatA, "the exemption from federal income tax is (i.e. lasts maximum or covers the german resident) for two years". What I wanted to say is that, according to art. 20(3), this is not true in case of a post-doc fellowship/grant.

Cheers
Salvo

Peter-Berkeley · Nov 11, 2009, 09:15 PM

Oh, it exist, finally I found it, a forum with people who can actually help - I have asked already so many...

I have read the thread and "Germany tax treaty 2 y _march19.pdf" but I am to stupid to transfer it to my situation. I am a Postdoc at school of public health at UC Berkeley since January 2008, thus I almost completed my 2 years stay limit - and I just extended my contract for 2010. I am (and will be) paid by money from a grant of my PI. During 2008/2009 I was under the German-US tax treaty, exempt from federal taxes.

As I understood this thread, in my situation I do not have to pay back the last two years federal taxes (2008/2009) - as stated in the pdf file, page 8: "....no retroactive loss of benefits if a teacher or researcher overstays the two-year benefit period." - or do I? Furthermore, in the thread it is mentioned that the two year limit does not always apply - guess, it does apply in my situation?

I am lost. Any advice, help is much appreciated. Thank you very much. Peter

AtlantaTaxExpert · Nov 12, 2009, 09:36 AM

As noted in earlier posts, the retroactive tax clause within the U.S.-German Tax Treaty no longer exists, so you were exempt for 2008 and 2009.

Starting on 1 January 2010, you become liable for FICA (Social Security and Medicare) taxes as a matter of U.S. tax law. Be sure your PI know this so they start the required withholding on time.

Your two-year period ends on the anniversary date of your arrival. On the following day, you lose the INCOME tax exemption for both the federal and state returns.

You will file as a resident alien for 2010, paying FICA taxes starting on 1 Jan 2010 and normal federal and state income taxes starting the day AFTER your two-year anniversary of arrival.

thunder11 · Nov 12, 2009, 11:03 AM

Note that if you claim the tax treaty, you have to file a German tax return. The tax treaty doesn't make it tax free, it just gives taxation authority to your home country (resident country) for the first two years. So the treaty is great if you have a DAAD or DFG or some other German fellowship, because these are tax free in Germany. But if you get paid by your US PI, you will have to pay taxes on that money in Germany. Sorry for the bad news!

I got busted for that four years later after claiming the tax treaty in 2001/02 (not knowing I had to do a German tax return after using the treaty). Luckily it was just a student side-job, so in the end I was under the minimum income for taxes in Germany (with all tuition expenses and plane tickets and other Werbungskosten), so there was no penalty. And I know of people who got away not paying any taxes by claiming the treaty. So it comes down to luck, whether you get caught by the German tax agency, or not. But the tax treaties are reported to Germany, so there is a good chance they will find out. Just keep that in mind.

Peter-Berkeley · Nov 12, 2009, 11:47 AM

Thank you both so much for finally shed light on this issue. I never fully understand the whole setup and all people I asked could not help me (HR person, student organization, friends and other postdocs here). It also already answers whether I am a non-resident or resident, thanks a lot. As far as I understand the university system, they will deal with my tax payment in 2010 as soon as I do not claim the exempt anymore. State taxes I am already paying, no chance here.
Thus, right now it is my deciscion whether to pay tax for 2008/2009 in Germany or US - or once the tax treaty is claimed, I have to pay taxes in Germany? Any German out there, who is/was in the same situation and who can tell me about pro's/con's where to pay (if I still have the choice)?

thunder11 · Nov 12, 2009, 12:16 PM

I'm not sure if you have a choice whether to claim the treaty - I'm still wondering about that as well. But generally the taxes in the US are lower than in Germany, so probably paying US taxes would be better. But it depends on individual situation (how much deductible you can claim in each country, if you are married, etc). See here for some insight (in German): Interpretation des Doppelbesteuerungsabkommens USA-Deutschland fuer US Stipendium Einkommenssteuer frag-einen-steuerprofi.de

The treaty is really great if you are in the US on a DFG or similar German PostDoc fellowship, because then you are exempt from tax in Germany under German tax law (§ 3 Nr. 44 ESTG), so you claim the treaty to be exempt in the US, and then you file in Germany but don't pay any taxes. But for US paid PostDocs, that doesn't seem to work (see link above link as well). As for me it appears I'm not a German resident anymore, I'm just going to pay US taxes. Which is probably cheaper anyway.

Good luck, and let us know if you find out more useful information.

thunder11 · Nov 12, 2009, 12:21 PM

Oh, I think you can still change your US tax return, and un-claim the treaty. Anyone knows for sure?

AtlantaTaxExpert · Nov 13, 2009, 01:58 PM

Claiming exemption under a tax treaty is an option, and, as long as three years has not gone by, you CAN change your mind by amending the return.

salvochi · Nov 16, 2009, 08:05 AM

Hi
When I was reading the Â§ 3 Nr. 44 ESTG, to decide whether my american fellowship is tax free in Germany as well, I did not read anything regarding the fact the fellowship has to be german in order to be tax free... Just general rules like "the stipendium has to come from a no-profit organization etc etc"...

Peter-Berkeley · Jan 5, 2010, 12:18 PM

First of all - this is the first forum with people knowing the facts, actual able to give good and thus far reliable answers - THANK YOU ALL!!
Can anyone tell me how to "un-claim" the tax treaty which I signed for 2008/2009? I asked some tax specialists but no one was able to give me an answer. Someone told me, I just file the federal tax and that's it - should at least work for 2009. However, for 2008 the tax filing was already due by 2009 (at that time I "filed 2008tax" under the tax treaty = no federal tax) - can I still (re-)file tax for 2008 in 2010?

AtlantaTaxExpert · Jan 6, 2010, 07:32 AM

Peter:

You can change your mind by filing the return that you would have filed had you not invoked the treaty.

Further, the passage of time does NOT stop you from filing a tax return. You can file a tax return from 1990 now if you want; you just would be UNABLE to claim any refund that was originally due to you - there is a three-year statue of limitation on claiming refunds, but there is NO time limit on PAYING the taxes that are due.

Peter-Berkeley · Jan 6, 2010, 08:44 AM

Thanks a lot for the answer - thus, the advice just to pay the tax is correct and there is no "being late fee" - that is good to know.
One last "question" - someone with a J1 Visa is "non-resident" for tax purposes for the first two years , thus no FICA tax has to be paid - from the third year, FICA tax has to be paid..
However, the university I am employed does pay the Salary always beginning of the next month, e.g. my 2009 December Salary was paid in January 2010, which happened to be the beginning of my third year in th US - resulting in a deduction of FICA tax. I don't mind, but I am curios because technically this salary is part of my 2009 income even though paid 2010...

AtlantaTaxExpert · Jan 6, 2010, 09:11 AM

Most taxpayers (and employers) operate on the "cash" basis of accounting, which means you get taxed on the salary on the date it is received (in your case, in January 2010).

If the taxpayer operate on the "accrual" basis of accounting, then you would have an argument that you should be taxed based on the fact that you EARNED the income in 2009.

BTW, while the IRS may forgive the "late-filing and/or late-payment" penalties, they cannot, by law, forgive any interest due, so expect to get a bill after you file the late tax return.

Further, you need to specifically ask that all penalties be forgiven when yo file the return, or the IRS will add them to the bill as a matter of routine.