US double taxation
Almost all expats moving to the US or returning to their home country need to deal with double taxation, as they will likely be tax residents in two countries during the year of the move and potentially even during their time in the US if they are on a temporary visa or keep ties to their home country. This guide reviews the most important tax implications that one should be aware. This guide particularly applies to students and postdocs in the US, including a case study for the German-US tax treaty.
This document is not professional tax advice, but a hopefully useful collection of useful resources and general information what should be considered. You are responsible for accurately filing your taxes based on your own research. If you are unsure, contact a tax professional.
The typical temporary visa are F1 (students) and J1 (researchers/teachers). These visa require that the visa holder does not intend to permanently migrate to the US whenever he or she enters the country. While it is fine to change your mind after being for some time in the US, expressing such intent (for example by lodging a green card application) may jeopardize reentry on this visa if you are temporary abroad (for example by travelling to one's home country after a green card application was lodged). Therefore, it is imperative to discuss any travel plans in the context of migrating permanently with an immigration lawyer.
In most cases, the temporary nature of the F1 and J1 visa are accurate and consequently the US assumes that the respective visa holder keeps a permanent residence in their home country (such as a room in their parents' home or with relative). This is the "permanent residence in home country" that such visa holders are often required to provide to their institution (university, employer, banks etc.).
Resident for tax purposes (US person)
If you live in the US, you will usually be tax resident, which is often also referred to as US person. For federal tax purposes, you will have the same status as a US citizen or permanent resident (green card holder), who are always US persons. You should be aware of the following:
Advantage: You can take standard deductions on your tax return. As of writing, the standard deductions of tax residents are around 12.000 USD, which should be plenty for most people. Only if you had higher expenses, it will be worth it to use itemized deductions.
Advantage: You can open accounts with institutions primarily focused at US persons.
Disadvantage: You need to declare your worldwide income and will be taxed on it. This can be pretty big disadvantage, but luckily most countries have tax treaties with the US, so you will typically not taxed twice. Still, you will have some beaucratic hassle.
Disadvantage: Some non-US banks will refuse you as customer and close your account. Almost all foreign banks depend on the US as they require access to US markets and the USD currency. US authorities therefore have significant leverage for demanding very detailed reporting procedures on customers that are US tax residents (such as their account balances and capital gains). Many smaller foreign banks therefore decided to avoid this bureaucratic hassle by not accepting US persons as customers. For most of such banks, you can find complaints online. You could try to avoid account closures by not telling your financial institution that you recently became a US person, but this would often be a violation of your agreement terms. Instead, it might be better to just go with a larger financial institution that accepts US persons as customers and fulfills the respective reporting requirements.
Disadvantage: You need to provide a detailed overview of any foreign assets you hold. This includes real estate, foreign accounts and many more things. Even though, there is no tax on these assets, there are draconic punishments if you do not fully disclose this information. Of course, the information will be used to ensure that you will declare foreign income in the future, as many of such assets are expected to produce income (dividends, capital gains, rental income etc.).
Non-resident for tax purposes
As a non-resident for tax purposes, you are only taxed on your income within the US. You do not need to declare your worldwide income or list your worldwide assets. However, you also cannot take as many deductions (so your tax rate will be higher) and
Substantial presence test
The substantial presence test is the prime criterion to determine if a foreigner living in the US is a resident for tax purposes. American citizens or permanent residents do not need to pass this test, as they always count as residents for tax purposes.
Exempt individuals (students, teachers or trainees, including au pairs)
Certain visa holders (such as F1 and J1) often count as so called exempt individuals for a certain time after entering the US. The time spent in the US as exempt individual does not count towards the substantial presence test, which will thereby delay the time until which you become a resident for tax purposes.
The most notable exceptions are students (on F1 visa) and teachers / trainees including researchers and au pairs (on J1 visa) which can exclude some of the time spent in the US because they count as "exempt individuals". The rules also apply analogously to M and Q visa holders if they are teachers or trainees (including researchers, such as postdocs). In either case, you need to file Form 8843 with your tax return, while you count as exempt individual. You do not have a choice for this. However, after the respective time period is over, you can either file as US person (all later rules apply) or argue that you continue to be an exception to the substantial presence test by claiming the "closer connection exception" (which everybody meeting the substantial presence test should check) or the "closer connection exception for foreign students" (which has weaker requirements, but can only be used by students).
As of writing (March 2021), the rules are as follows: You can exclude the days you spent in the US during the first x calendar years on the respective visa (with x=5 for students and x=2 for teachers), from the substantial presence test. For example, if you start to study in the US October 2014 and complete your program in summer 2019, you will be able to exclude any days in the five calendar years 2014, 2015, 2016, 2017 and 2018. Starting in the year 2019, any days present in the US count for the purpose of the substantial presence test. Depending on when exactly you exactly finish your program and potentially leave the US, you might or might not be a US person for the year 2019. Again, for the substantial presence test in the year 2019, you will need to add up any days present in the US for the years 2017-2019, but as you were exempt in the previous years, you would only count the days for the year 2019.
Tax treaties regulate the rights to tax people who have ties with two different countries. The standard scenario is a foreign national coming to the US for a limited amount of time, who still has some "permanent" residence (domicile) outside of the US. This applies particularly to foreign students and temporary workers (research visitors, postdocs, interns etc.).
Non-residents for tax purposes cannot take standard deductions, which means there is not base amount that is tax-free. This is partially compensated by tax treaties which provide exemptions (see above). While non-residents for tax purposes cannot claim standard deductions, they usually can still claim itemized deductions.
The most important category for many internationals used to be "unreimbursed employee expenses", which in particular included travel expenses with partially rather high per diem rates (when staying overnight). Unfortunately, Donald Trump's tax reform (Tax Cuts and Jobs Act - TCJA) of 2018 removed the ability to deduct unreimbursed travel expenses, which is expected to apply to the years 2018-2025. Before this time, deducting unreimbursed travel expenses was a great way for PhD students and postdocs (attending conferences etc.) to significantly reduce their tax burden. This was mostly based on the per diem rate. When a PhD student had a research visit at another institute, for which there was no specific reimbursement, one could deduce 30 USD and more per day (depending on the cost of living in the respective city/country). Unfortunately, this is no longer possible, unless you fall into special categories, such as being member of the armed forces and itemized deductions will only make sense if they are larger than the standard deductions (12,000 USD in the year 2018).
Case study: German-US tax treaty
As of writing, the German-US tax treaty consists of the original agreement from 1990 and an amendment in 2019. The most important articles for our purpose are the following:
Article 4 on Residence (Ansässigkeit)
Article 10 on Dividends (Dividenden)
Article 11 on Interest (Zinsen)
Article 13 on Gains (Veräußerungsgewinne)
Article 15 on Dependent Personal Services (Unselbständige Arbeit)
Article 20 on Visiting Professors and Teachers; Students and Trainees (Gastprofessoren und -lehrer; Studenten und Auszubildende)
Article 4 - Residence
We consider the typical scenario of somebody moving from Germany to the US for 2-5 years to the US to either study (including PhD studies) or to conduct research there (as postdoc or visiting student). The student or researcher will keep their permanent residence in Germany ("Lebensmittelpunkt"), while only moving temporarily to the US. For the purpose of the tax treaty (article 4), they will be considered a resident of Germany ("unbeschränkt steuerpflichtig") and a non-resident for tax purposes in the US.
Article 10, 11 and 13 - Taxation of capital gains and interest
Most capital gains and interest are exclusively taxed in Germany and accordingly exempt from federal taxation in the US (state taxation varies depending on the specific state, but many states do not tax capital gains or interest). Dividends paid by US companies are taxed at a reduced source tax of only 15% (rather than the typical 30%).
In order to implement these tax rates (0% on interest, 15% on dividends), it is important to fill in form W-8BEN when opening a bank or brokerage account. Some online accounts that are only intended for US persons (genuine US tax residents) may not offer the option to submit W-8BEN or even reject you as a customer if you explain that you are not a US person.
Note, however, that many temporary residents / non-residents of tax purposes may have active accounts (Robinhood, Ally bank etc.) that are primarily intended for US persons. In practice, this is not a problem as long as you declare your taxes in accordance with the tax treaty, i.e., make sure that you declare any associated income (mostly dividends).
Article 20 (1) - Exemption of professor/teacher salaries
According to article 20 (1), the salary of a professor/teacher, who is a resident of Germany and only stays in the US for two a maximum of two years, will only be taxed in Germany, even if the salary is paid through the US. If you already took advantage of other treaty benefits, namely paragraphs (2), (3) or (4), you cannot use this benefit. Note that the revision of this article in 2009 ensures that the benefit of this clause does not need to be paid back retrospectively if you happen to stay longer than two years, i.e., you can take advantage of this article for the first two years of a longer visit. This clause is particularly beneficial if the respective payment is tax free in Germany, as this would mean that it is neither taxed in the US nor in Germany.
The typical scenario of this article would be a German professor (Professor, Hochschullehrer, Privatdozent) or teacher (Lehrer) who is employed in Germany, but visits the US for a limited time, while receiving some type of salary (from Germany, from the US or some other sources). Technically, this article only applies to professors (Hochschullehrer) and teachers (Lehrer), so it seems that a postdoc or PhD student cannot use this article, unless they can somehow argue that they visit the US in the role of a teacher/professor (e.g., teaching a course or so).
Article 20 (2) and (3) - Exemptions for fellowships
A tremendous advantage of the German-US tax treaty is that scholarships are exempt from US federal taxes (state taxes need to be checked separately). This includes foreign fellowships (such as German ones), but also US fellowships. As US fellowships are usually taxed they are typically large enough that even after taxes they provide a generous living allowance. Not needing to pay tax on them can therefore often add another 10-15k USD in allowance.
In order to the tax exemption to apply, the fellowship holder and the fellowship need to satisfy the following criteria:
The German-US tax treaty needs to apply. The fellowship holder therefore needs to count as resident of Germany (e.g., by having a key to an abode in Germany that he/she can call "permanent residence", which could be the place of parents/relatives).
The fellowship must not be a compensation for personal services (i.e., regular employment). It is imperative that the fellowship holder does not hold regular employment with employment contract, supervisor and specific duties (dependent services). Any fellowship that is paid through a university or research institution by means of regular employment will not count for the tax treaty. However, there are other fellowships that are paid through university or research institution, but do not count as regular employment. In this case, it is important that the institution's payroll associates income code 16 (scholarships) to this payment and NOT 17 or 18 which would correspond to compensation for personal services.
If these two conditions apply, typical fellowships/scholarships are not taxed in the US. More specifically, Article 20 (2) ensures that payments to a German student from sources outside of the US are not taxed, as long as it is not a payment for personal services. Article 20 (3) extends similar conditions even further, so that a general person (including researchers/postdocs/etc.) receiving payments from a any type of public or non-profit organization (including sponsored prize monies and similar awards) are not taxed in the US, as long as it is not a payment for personal services. A big problem are fellowships that are paid through regular employment, i.e., if it is called fellowship and potentially given by a non-profit organization, but paid through the research institution via a regular contract. While this may make no difference at all to the institution, from a tax perspective this may mean the difference between a generous tax-free allowance and heavily taxed salary.
The typical scenario are students or visiting researchers (including postdocs) who visit the US and are not funded by regular employment, but rather through some type of fellowship, scholarship or travel grant. Article 20 (2) applies to students receiving non-US funding (e.g., a German scholarship through Studenstiftung, DAAD or other scholarship organizations), while Article 20 (3) also applies to non-students (such as interns, postdocs, researchers etc.) who receive general non-profit funding, namely a "grant, allowance or award", which can even come from the US. The latter case applies to German research fellowships, such as the Feodor Lynen Fellowship of the German Alexander von Humboldt Foundation, but also to research grants from US institutions, as long as they are not "compensation for personal services" (i.e., employment).
Article 20 (4) - Partial exemption for student/researcher salaries
While the previous articles explicitly excluded any type of employment income "compensation for personal services", Article 20 (4) exempts a part of such salary for persons, for which Article 20 (2) or (3) applies, provided that the person is present for period not exceeding four years. The original tax treaty exempts 5000 USD, which was increased to 9000 USD, i.e., as of writing the first 9000 USD of employment income are tax free if this article applies.
The typical scenario is a student, trainee, intern or a postdoc in the US, who funds his stay partially by regular employment. For example, graduate students or also postdocs may be paid for teaching a class or receive a top up salary for work on another research project. Note that the visa conditions may restrict the potential employment, i.e., graduate students on an F1 visa are often only allowed to work for the university or require DHS authorization (as marked on their social security cards). While Article 20 (4) applies to any student according to Article 20 (2), it appears to only apply to researchers/postdocs/etc. who also fall under Article 20 (3), i.e., who receive some type of tax exempt fellowship.
Subtlety 1 - Four year requirement. An important subtlety is the requirement that this article only applies if you are less than four years present in the US. It is not clear if and how interruptions are taken into account and how you are required to pay back a potential tax advantage if the stay was initially planned for four years or less, but is then extended. In this case, one may need to file an amended tax return which may lead to interest penalties, unless the relevant competent authorities agree that the tax benefit persists for a longer period of time. We can think of the following non-trivial scenario: A German PhD student completes a PhD in five years and receives salaries for five calendar years (e.g., August 2010 until July 2015), but organizes extended research stays abroad, so that he or she is only present for ca. 40 months during this time. Does this mean the PhD student could take advantage of the tax treaty benefit for the full period, as he or she is never present for more than four years? There are numerous stories of people to just take advantage of the four year tax reduction without ever required to pay it back, when they stay longer, but this is likely not intended by the IRS and betting on falling under the radar (while being fully aware of the rules) may be a serious offense leading to severe penalties or worse.
Subtlety 2 - Article 20 (3) requirement. Another important subtlety is the requirement for non-students to fall under Article 20 (3). If a Postdoc is regularly employed on the US and does not receive some proper fellowship, would it be sufficient if he or she received a single tax free one-time travel award or similar funding to benefit from Article 20 (4)? What happens if a non-profit organization sponsors a fellowship, which is paid as salary through a regular employment contract. As Article 20 (3) excludes these cases, also Article 20 (4) may not apply, so that somebody receiving such a fellowship is more heavily taxed than somebody who receives a small fellowship on top. If such a person would win a small award or fellowship on top of their employment (even for a small nominal amount), it may mean that Article 20 (3) applies which would lead to a significant tax reduction.
Article 20 (5) - Exemption of intern/trainee salaries
This article applies to German interns, trainees and similar who spent less than one year in the US and are either working for a German company (with offices in the US or so) or an organization mentioned in Article 20 (3), i.e., a non-profit, scientific or government organization, and receive less than 10000 USD in compensation from outside of the US.
The typical scenario is a German trainee or intern who visits a US office of a German company for less than a year and receives less than 10000 USD during this time. In this case, there is no US tax to deal with, but the salary may still be taxed in Germany (depending on the circumstances).
Subtlety 1 - company of the other state. Technically, the article requires that the company is from the same state as where the person is resident, i.e., the article would only a apply for a German interning with a German company in the US. It is not completely clear what the precise requirement is, i.e., if a US subsidiary of a German company would be enough or how this should be structured.
Subtlety 2 - outside funding. This article requires that the "compensation remitted from outside", i.e., the payment should not come from US institutions. While the organizations mentioned in Article 20 (3) are not required to be from outside of the US, Article 20 (5) appears to require that the money is paid from outside of the US, which likely excludes any organizations within the US. Therefore, the article would apply when interning with a German organization (such as the Goethe institute) and being paid in EUR from Germany, but it would not apply to somebody interning with a US NGO.
Declaring tax treaty exemptions
When you file your US taxes, you need to declare that you take advantage of a tax treaty. The tax forms change from time to time. While before 2020, you had the choice between 1040-NR EZ (a simplified form for non-residents) and 1040-NR (the full form, potentially with several attachments), as of writing (March 2021) there is a single unified form 1040-NR. In order to claim tax treaty exemptions, you need to attach the separate Schedule OI, where you declare and calculate any tax treaty exemptions (and also state specifically, which article and clause you take advantage of and for how many months). The resulting amount is then declared in 1040-NR in line 1c and apart from that excluded in all following calculations, i.e., if 9000 USD of income are exempt due to Article 20 (4), you would state this here and apart from that only list your salary reduced by 9000 USD. Note that line 1b requires you to list scholarship and fellowship grants, but this does not apply to those that are exempt based on tax treaties (as they are included in line 1c).
Taxation in Germany
The tax treaty is structured in such a way that after the residency is determined, the respective person mostly gets tax advantages in the other state. A German resident visiting the US therefore counts as tax resident of Germany ("unbeschränkte Steuerpflicht"), so that any worldwide income needs to be declared in Germany. According to Article 15 regular employment income in the US is only taxed in the US, so while you are still required to declare this income in your German taxes, it only falls under the so called "Progressionsvorbehalt" which means you remaining German income is taxed with the same tax rate as you would have if the US income would be included (though this tax rate is only applied to your German income). In the common case that you do not have any German income, this means effectively that you do not need to pay taxes in Germany.