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

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.

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.

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

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! :-)

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

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.

Quote:

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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

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

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.

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.

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)?

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.

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

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.

Hi
When I was reading the § 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"...

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?

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.

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...

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.

The Technical Explanation of the Protocol of 2006 (www.irs.gov/pub/irs-trty/germanyte07.pdf) says that "if the two-year period beginning from the date of his arrival is exceeded, the exemption will apply, but only for the first two years and only if the visit is temporary”. However, there is no definition of "temporary".

Temporary means if the person does NOT become a green card holder.

This thread is old but still: thank you!
I was about to claim the tax treaty between Germany and USA since I was under the impression that my US income (no scholarship) would be tax free, no taxes in USA and no taxes in Germany. At lot of people are under the same impression it seems. This forum helped a LOT to clarify the situation, thank you. I haven't calculated it but I assume that as a single I should better pay taxes in USA than in Germany.

Yes, that is probably true.

New question,

If I come back to Germany after 2 years and half. Do I need to pay taxes retroactively to Germany tax department? Or I am free for both US and Germany taxes for the first 2 years?

Sorry, but this forum deals ONLY with U.S. taxes.

However, most European countries do NOT tax income earned OUTSIDE of the borders.

Hello,
What can happen if I get married with a US citizen before my 2 years tax exemption finish? Do I have to pay taxes to IRS for the two years I was on my J1 visa?
Thanks in advance?
Iliana

No, that should not matter, UNLESS you choose to file jointly.

Thanks to everyone in this forum, this is so helpful!

AltantaTaxExpert, could you elaborate on the filing jointly comment?

I'm a J1 PhD student and claimed the Germany-US Treaty for the first four years of my program. First of all, I am unsure whether the retroactive clause was also deleted for my case (and I'm only thinking about the 9000 Dollar exemption on my teaching salary, because my stipend/fellowship, if I understand 20(3) correctly, will be exempt indefinitely as a J1/non-resident/temporary, right?). I see the word retroactive nowhere in the article 20.

2012 is year 5 for me, in which I also got married to a US citizen (green card process not yet started, but will have to this year), and I was under the impression you could file jointly and still invoke the savings clause for my stipend/fellowship portion (which, as far as I could find it in the treaty includes students). Or, but I am not sure I got this right, my husband could file as head of household because his income is higher, which - I think - would enable me to stay a non-resident for tax purposes (and I could invoke the treaty for the fellowship).

And to think even further: Next year, I would be a dual status alien, or a resident for tax purposes because of filing jointly this year, right? Could I invoke the treaty until my J1 status changes to the green card or would I get in trouble with the definition of "temporary"?

Thanks so much to you -- my university is very tentative in giving advice on these issues, but I don't trust my understanding of these matters quite yet.

Oh, PS: Can I even claim 20(3) of the tax treaty without claiming 20(4), or to ask in reverse: how could I have ever not have claimed (4) (in those first four years, potentially not rightfully so in a five year PhD contract), when my university's withholding policy always assumed that I would claim 20(3)? Oh, I don't know if I'm even making sense anymore... sorry!

Your timing for posting this question is not good because, to answer properly requires research, and at this time of the year, I cannot do that research due to my busy schedule.

Off-hand, with no research, I would say you CANNOT claim the $9,000 exemption because the treaty clearly says for four years only

I do not think a retroactive clause applies.

It would probably be best for you tax-wise just to file jointly wuth your husband.

Of course, I understand. Thank you for your quick response! Thanks for your advise!

Sorry I could not give you a definite answer!

Dear AtlantaTaxExpert and others:

First things first: Many thanks for your discussion. This has been extremely helpful. I'm currently trying to decide whether I can and should claim tax exemption on US federal taxes.

My background:
- PhD in the US, at the beginning of my 2nd year, on a J-1 (German national), married to a French national (here as well, on a J-2) - I've paid the 14% federal tax so far but I know that I may file an amendment
- As any J-1 has to, I do have an address back home (i.e. in Germany)
- My income is from the US, from my university's scholarship. I may get additional pay if I take a job as a research assistant and I'm aware that I'd have to pay taxes on that - my question is about the scholarship. My scholarship is for years 1, 2 and 5 of my PhD
- I was on an H1B before, for about 1 year - I filed (and paid) all my corresponding taxes. My change to a J1 was not a "change of status". I left the US and came back on my J1

Could you give any recommendation as to whether I can and should claim the tax treaty?

Many thanks!

It appears that you ARE eligible for total tax exemption on your scholarship per Article 20(3) of the U.S.-Germany Tax treaty. You will need to file an amendment if you paid taxes on your scholarship.

The J-1 visa also makes you exempt from FICA (Social Security and Medicare) taxes for the first two calendar years of your J-1 visa, so if you start working as a graduate assistant in those first two years, be sure to claim that exemption.

Thank you very much - this is very helpful! I saw a lot of German replies on this thread - do you (or any of the others) have any idea about whether I would have to pay taxes there instead?

Sorry, I am NOT an expert on German taxes, so I cannot say for sure.

Logically, though, I do not think so.

Thanks a lot for your answer - of course, I understand. However, what made you think that, "logically", I wouldn't have to pay taxes there? Isn't the treaty just a mechanism to make sure I pay taxes in one -- at least one -- of the two countries? Could you elaborate on this a bit more?

Most countries do NOT tax scholarships unless they represents payments beyond the normal tuition, fees and living costs.

Example: Someone who gets several different scholarships that they receive in cash to pay for their costs, and the total of the scholarships exceed the tuition, fees and boarding costs at the university. In that case, the excess is taxable income.