The Ins and Out of US Taxation for German Citizens
American tax rules are complex for US taxpayers, but they can also be confusing for others who spend time working in the US or have US investments. Let’s take a closer look at some of the more common tax situations for US non-residents.
Definition of a non-resident alien (NRA for short)
First off, we need to define exactly how an individual is classified for tax purposes, and a non-resident alien is the most common classification for foreigners working in the US. A non-resident alien is any individual who is not a Permanent Resident (also known as a green card holder), US Citizen, or US National that has not met the green card test or the substantial presence test.
Why is it beneficial to be classified as a non-resident alien?
If you file as a non-resident alien, you will only report and pay taxes on your US tax return the income and deductions related to US sourced income. If you file as a resident alien, you will need to report and pay taxes on your worldwide income and deductions on a US tax return.
Who needs to file a US Tax Return?
So now that we understand how resident and non-resident aliens are taxed, let’s look at the particulars of which NRA’s need to file:
- A NRA individual engaged in trade or business in the United States during the tax year. If you have US wage income less than the personal exemption amount (in 2014 $3,950) you do not need to file a tax return. This type of income generally consists of earned income such as wages, salary, small business, self -employment, etc.
- A NRA individual not engaged in trade or business in the United States during the tax year, but has US sourced income on which the tax liability was not satisfied by withholding at the source. This type of income is generally passive income such as interest, dividends, and capital gains. While passive income is the most common type of income in this category, it can consist of other types of income such as retirement or annuity income.
- Any representative or agent required to file for #1 or #2 above
- A fiduciary for a nonresident alien estate or trust. A fiduciary is a person who holds a legal authorization to manage/control a trust.
- A legal guardian or caregiver of #1 or #2 above who is required to file a tax return on behalf of the individual. This can be a parent of a minor child, a legal guardian of an incapacitated adult, or a guardian of an estate.
When do you file a US tax return if you are a non-resident alien?
You would need to file a US tax return if any of these situations apply to you:
- You have wages or salary of more than $3,950 (for 2014) while working within the United States. This includes wages, salary, and self-employment income.
- You are a student or scholar visiting with a F, J, M, or Q visa and have taxable income in the United States.
- You are living outside the USA but have US sourced income such as interest, dividends, capital gain, etc. and the income did not have mandatory withholding subtracted from it at the source (i.e. the financial institution).
- You meet the substantial presence test. This test is a bit confusing, but you meet the requirements of this test if you were physically present in the United States for at least 31 days during the current tax year (2014) and 183 days during 2012-2014 using the following calculations:
Days of physical presence
Testing days (multiply b times c)
|Total testing days (add column (d) together…………..|
For example – You were in the United States the following times:
- June 2 – 20, 2014
- July 2 – 15, 2013
- Oct 5 – 10, 2012
You would calculate out the days as such:
Days of physical presence
Testing days (multiply b times c)
|Total testing days (add column (d) together…………..||26|
In this example you would not meet the substantial presence test for filing a tax return.
You can be considered exempt from the substantial presence test if you meet the following:
- Were present in the USA for less than 183 days in 2014
- Establish a tax home in another country (a residence where you primarily live and work)
- Establish that you had a closer connection to a foreign country where you have a tax home.
You will be considered to have a closer connection to a foreign country than the United States if you or the IRS establishes that you have maintained more significant contacts with the foreign country than with the United States. In determining whether you have maintained more significant contacts with the foreign country than with the US, the following factors will be taken into consideration:
- The country of residence you designate on forms and documents
- The types of official forms and documents you file, such as Form W-9, Request for Taxpayer Identification Number and Certification, W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, or W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States.
- The location of:
- Your permanent home
- Your family
- Your personal belongings, such as cars, furniture, clothing, and jewelry
- Your current social, political, cultural, or religious affiliations
- Your business activities (other than those that constitute your tax home)
- The jurisdiction in which you hold a driver’s license
- The jurisdiction in which you vote
- Charitable organizations to which you contribute
What if you simply hold US investments?
If you are a German resident and have investments in the US, you may be required to report income earned from your investments from the USA. You will need to report:
- Capital gains
- Retirement income
- Annuity income
Under Article 11 of the US-Germany tax treaty, the US is not allowed to impose any tax on US-sourced interest earned by a German resident. This means that if you are a US NRA, you would report the interest on your US tax return, but then use the Foreign Tax Credit to reduce any taxes owed to zero. So you would offset the taxes you pay to Germany on the interest using the Foreign Tax Credit to avoid dual-taxation.
The US may impose a tax on your dividend and capital gain income from the USA. The maximum allowable tax rate is 15%. If the withholding of tax is greater than this, you will need to file a US return to get a refund of the difference (even if you are below the filing threshold).
Example: You own an investment account in the USA. This fund distributes the following to you in the calendar year:
- $3000 Dividends, 30% withheld for income tax ($900)
- $1000 Interest
You would report the dividends and interest income on your US 1040NR tax return. You would then indicate that the dividends should only be taxed at 15%. This would give you back $450 of the income taxes already withheld from your dividend payment. The German taxes that you pay or accrue on your dividends and interest would then be calculated to offset any taxes incurred in the USA, using Form 1116. If there were no taxes paid to Germany on this income, you would need to pay general US rates on this income.
US taxes can be confusing even without the added complexity of being a non-US citizen! If you are living or investing in the US, we highly recommend speaking with a tax professional before filing your taxes. Overpaying US taxes is very common for foreigners, as they are often not aware of tax treaties and other helpful credits that reduce or eliminate taxes in the US.
About Greenback Expat Tax Services
Greenback Expat Tax Services specializes in the preparation of US expat tax returns for Americans living in Germany and around the world. Greenback offers flat fee pricing, a simple, hassle-free process and experienced CPAs and IRS Enrolled Agents who work with expats 100% of the time. For more information or to have a Greenback accountant prepare your US tax return, visit http://www.greenbacktaxservices.co
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