tax treaty

[Anna901]

I am a non-resident alien in Massachusetts. Despite being a German citizen, I am currently not a German resident and not subject to taxation there. My understanding of the tax treaty is that it should prevent me from being subject to double taxation in both the US and Germany. Given that I do not have any tax liability in Germany at the moment, I assume the tax treaty does not apply to my situation. Is that correct?

[DaveF1006 · Accepted solution]

Yes, the tax treaty will not apply since you won't be filing a return in Germany.

[Anna901]

Thanks for the super quick confirmation!
From January 2024 on, I will also receive a german research scholarship. The scholarship is directly transferred to my German bank account, as they dont transfer abroad. The scholarship is always tax-free in Germany. In addition to the scholarship I will receive a small salary from the US University, from which they automatically withhold taxes, health insurance etc.
1. I assume, I need to pay taxes in the US, even though the scholarship is tax-free in Germany?
2. If so, do I need to register for quarterly tax payments in regards to the scholarship here in the US?

3. How do I know the amount of taxes to pay on the scholarship?

4. For my 2024 tax filing (I am then considered a resident alien), I add the scholarship as additional income? 
Thanks again!

[DaveF1006]

Yes, this will be US based income and you will need to pay taxes on it. The amount of tax is difficult to ascertain without knowing the amount of the scholarship and the amount of your salary. As far as determining if you need to make quarterly tax payments or not, here is a guide that can help you make the decision.

• You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.
• You expect your withholding and refundable credits to be less than the smaller of:
  • 90% of the tax to be shown on your current year’s tax return, or
  • 100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months. 

'The first bullet point is something you may be primarily concerned with. Also, in 2024 when you become a Registered Alien, the scholarship will need to be reported as income.

Best of luck in your future endeavors and may your future be bright.

[Anna901]

Thank you so much. This was very helpful indeed!

[spapad]

Hello,

I have a question regarding this. The Germany-US Tax treaty article 20 (3) says:

"Payment other than compensation for personal services that a person who is or was immediately before visiting a Contracting State a resident of the other Contracting State receives as a grant, allowance, or award from a non-profit religious, charitable, scientific, literary, or educational private organization or a comparable public institution shall not be taxed in the first-mentioned State."

This means that if I was a resident of Germany immediately before coming to the US (and actually for a while during my stay in the US, but now not anymore in my case) I can claim this tax treaty , right?

[DaveF1006]

Yes. The tax treaty would apply in this case and you should only be taxed in Germany as defined by the context of the treaty. in this context, the US is defined as the Contracting State and Germany is the other contracting State since you were a resident of Germany prior to coming to the US. 

Since the US is the first-mentioned state, you will not be taxed on the types of income you mentioned above. Doesn't apply to personal income however.

US/Germany Tax Treaty-Article 20

[Anna901]

Hi Dave, for the 2024 tax year, the scholarship covers part of my salary (~ $47,312) and the other part is provided by my US employer in Boston (~ $24,138). The US employer is withholding state/federal taxes automatically. Taxes are not withheld from the scholarship payments. I dont have any dependents and no other income. Could you elaborate more on how to determine the quarterly taxes for the scholarship and how to report it? Thanks!

[DaveF1006]

The easiest method is to go to this IRS website and to go to the worksheet on page 8 to help calculate your estimated tax payments.