Taxation Students USA and Glossary NAP

For employees who receive wages subject to U.S. income tax withholding or persons who have an office or place of business in the United States, income tax must be filed by the 15th day of the fourth month after the end of the fiscal year

For a U.S. citizen/resident alien (resident alien) who resides abroad or is in military service outside the U.S., an automatic 2-month extension to June 15 applies. If there is a qualification for the 2-month extension, penalties for late payment of taxes will be assessed from the 2-month extended due date for payment (June 15 for calendar year taxpayers). Interest must be paid on all taxes not paid by the regular due date of the tax return

A request for extension of the deadline up to six months is possible

If a person is not an employee or self-employed person receiving wages or non-employee compensation subject to U.S. income tax, or if a person does not have an office or place of business in the United States, the tax return must be filed by the 15th day of the sixth month after the end of the tax year

Individuals who are taxable in the U.S. and have foreign accounts

Foreign Financial Institutions (FFIs) and Non-Financial Foreign Enterprises (NFFEs).

Foreign pensions

Foreign shareholdings

Foreign partnership interests

Foreign financial accounts

Foreign investment funds

Foreign life insurance policies

Foreign hedge funds

If there was a financial interest in, or signature or other authority over, bank, securities, or other financial accounts in a foreign country, the aggregate value of which exceeds $10,000 at any time during the calendar year, an FBAR report must be filed

Generally, no report need be filed if the assets are in a U.S. military bank operated by a U.S. financial institution or if the total value of the assets in the account(s) is $10,000 or less during the entire year

conduct a trade or business in the U.S., or

earned certain income from U.S. sources and did not pay sufficient U.S. withholding tax on that income

Foreign entity receiving a payment subject to withholding tax from a withholding agent, a payment subject to withholding under Chapter 3

Entities that hold an account with a foreign financial institution (FIE) that requests this form.

Form W-8BEN applies to individuals and sole proprietorships

Either a US Social Security Number (SSN) or the Individual Taxpayer Identification Number (ITIN) must be entered here

Form W-8BEN-E applies to all other companies

The Federal Tax ID (EIN) must be entered here.

is an official or director of a foreign company

Acquires shares in a foreign company exceeding the prescribed thresholds

makes a sale of shares in a foreign company so that the shareholding in the foreign company falls below the threshold.

has control over a foreign company at least 30 days a year without interruptions

Satisfies the above point and is a shareholder of at least 10% of this company and owns this share on the last day of the year

The payer, such as financial institutions or small businesses, completes the form and sends copies to the payee and the IRS

Form 1099-DIV: if you own a stock or mutual fund that pays dividends

Form 1099-INT: if you have a checking, savings, or other bank account that earns interest.

Form 1099-R: for distributions from annuities, pensions, retirement or profit-sharing plans, IRA's, insurance contracts.

Form 1099-NEC: for companies that provided $600 or more to nonemployees.

Form 1099-MISC: miscellaneous income (receipt of payments for rents, royalties, prizes, awards, etc.).

Form 1099-G: Reporting Unemployment Compensation or State or Local Income Tax Refunds.

Information about the employer

Total income of the employee over one year

Amount of taxes withheld

Tips collected over one year

Details of several jobs, if applicable

Any employer engaged in a trade or business that pays compensation, including noncash payments, of $600 or more for the year for services performed by an employee

Freelancers and self-employed persons are excluded

The green card allows the holder to work and reside in the United States. As a rule, green cards have no expiration date, but are usually valid for ten years and two years for conditional permanent residents. The green card can serve as part of an immigration process for permanent residency in the US.

U.S. citizen or resident alien living or traveling outside the United States.

Income, tax status and age generally determine whether a tax return must be filed

If there is an interest in specified foreign financial assets, a statement of specified foreign financial assets must be filed

A nonresident alien who carries on or has carried on a trade or business in the United States during the year

A nonresident alien who is not engaged in a trade or business in the United States and has U.S. income on which the tax liability has not been satisfied by withholding at source

A representative or agent responsible for filing the tax return of a person described in the above two items

A trustee for a nonresident alien estate or trust

a resident or domestic fiduciary or other person charged with the care of the person or property of a nonresident may be required to file an income tax return for that person and pay the tax

Income of non-resident aliens (nonresident alien), which must be reported:

1. Income effectively connected with a trade or business in the United States
2. U.S. source income that is fixed, determinable, annual, or periodic (FDAP).

The Internal Revenue Code is the main body of U.S. federal tax law. It includes income tax, payroll tax, estate tax, gift tax, and excise tax. The IRS is responsible for interpreting and enforcing the IRC.

The Internal Revenue Service (abbreviation IRS) is the federal tax authority of the United States and reports to the Department of the Treasury.

The J visa (often also student visa) is also called Exchange Visitor Visa. The purpose of the visa is to promote international understanding. The law literally: "To increase mutual understanding between the people of the United States and the people of other countries through mutual education and cultural exchange".

Sole Proprietorship

Sole Proprietorship is a sole proprietorship and includes an individual who is responsible for the day-to-day operations of the company. The business does not exist as a separate legal entity from its owner, therefore the owner and the business are considered one person. The owner has personal and unlimited liability for the company's debts. From a tax perspective, the income and expenses of the business are recorded on the owner's tax return. To incorporate, all that is required is a filing with the IRS. A Sole Proprietorship can be compared to a sole proprietorship.

A Sole Proprietorship is only suitable for US residents.

Partnership

Partnership is a form of business that involves two or more owners. Similar to a Sole Proprietorship, the business does not exist separately from its owners as a legal entity. The owners have unlimited liability for debts of the business. Income is taxed proportionally in the owners' income tax return. According to the criteria, this legal form is similar to a general partnership, since here, too, at least two legal or natural persons establish the general partnership and have unlimited liability with their private assets.

The limited partnership is a special form. There are one or more limited partners who are not involved in the day-to-day management of the company and are therefore only liable to the extent of their paid-in capital contributions. In addition, there are one or more general partners who have decision-making authority and unlimited liability with their private assets. Thus, this legal form comes close to the KG, since there are also partial and full partners.

A (limited) partnership is unsuitable for non-US residents.

Corporation

In the case of a corporation, shares can be traded on the stock exchange in the same way as in the case of an AG. It is a separate legal entity and thus shareholders are liable for their paid-in contributions. Holders receive shares for their paid-in amount upon incorporation. The total par value of the shares constitutes the corporation's share capital. Unlike a corporation, there is no minimum capital requirement for incorporation. The management is taken over by the board of directors, similar to the board of directors of an AG. By means of a shareholders' meeting, shareholders have an indirect influence. There is no body close to a supervisory board. With regard to taxation, there are two forms of a corporation. A C corporation is subject to corporate income tax, while profits of an S corporation are taxed via the shareholders' income tax return.

A C corporation, unlike an S corporation, is suitable for non-U.S. residents.

Limited Liability Company (LLC)

LLC combines features of a partnership or a sole proprietorship and a corporation. Thus, an LLC has similarities to the mixed legal form GmbH & Co. KG, as it combines characteristics of a KG and a GmbH. Like a corporation, an LLC is a separate legal entity, whereby the partners have limited liability. With regard to taxation, it is based on a partnership/sole proprietorship, as profits are taxed via the partners' income tax returns. Unlike a GmbH & Co. KG, there is no minimum capital requirement for the formation.

An LLC is suitable for non-US residents. There are tax differences.

In addition to the Federal & State Tax, many municipalities/cities impose a local income tax.

This is also assessed against federal income tax and varies widely. The Tax Foundation counts over 5,000 taxing jurisdictions in 17 states that have a local income tax.

Non-resident alien is:

A person who is not a U.S. citizen or resident alien

A person with a temporary residence permit

A nonresident alien individual who is married to a U.S. citizen or resident individual may elect to be treated as a resident alien for certain income tax purposes. However, that person is still subject to the withholding rules

Basically, if you are in the USA, all income is taxed there according to the so-called world income principle. In the USA, there is no exemption for income already taxed abroad. Instead, the taxes paid abroad are credited against the taxes in the USA. This means that income that is tax-free or only slightly taxed in Germany, for example, only has a minor impact on the US tax.

But according to Art. 6 DBA-USA applies to resident aliens:

1. Income derived by a resident of a Contracting State from immovable property (including income from agricultural and forestry holdings) situated in the other Contracting State may be taxed in the other State.

2. Paragraph 1 shall apply to income from the direct use, rental or leasing and any other type of use of immovable property.

Someone who is a resident of the USA can therefore pay tax on income from German real estate (e.g. renting) in Germany. The tax paid is then credited against the US tax.

However, if real estate is sold in Germany after more than 10 years, the German tax cannot be credited in the USA, as this is generally tax-free in Germany pursuant to §23 EStG. If there is a tax liability in the USA, this profit is taxed there in full due to the world income principle.

Non-resident aliens are subject to the general rules and exemptions. Generally, they are not taxed in the U.S. unless they are subject to the substantial presence test and are not exempt individuals.

A Resident Alien is:

Not a US citizen

A person who has been granted the privilege under immigration laws to reside permanently in the United States as an immigrant. This status results when the U.S. Citizenship and Immigration Services (USCIS) has issued an alien registration card, also known as a green card.

A person who meets the Substantial Presence Test for the calendar year

The state tax is levied independently by the states and varies by state. The amount of the state tax can be offset against the federal tax.

Ex: Massachusetts imposes a flat 5% tax in 2020 on both disbursed (salaries, wages, tips, commissions) and undisbursed (interest, dividends, and capital gains) income. In contrast, New York State income tax rates range from 4-10.9% depending on taxable income and filing status. In addition, the taxpayer's residency status determines which income is taxable.

Generally, students with U.S. income are subject to the general rules of taxation for resident aliens (i.e., green card holders or persons treated as resident aliens based on actual presence, i.e., subject to a substantial presence test). (Form 1040NR and 1040NR-EZ)

Non-U.S. income students with only foreign income are subject to the non-resident alien rules. They are not required to file a U.S. tax return, but they may still be required to file a tax return. A return must be filed because you were physically present in the U.S. but are neither a resident alien, a taxable non-resident alien, nor subject to the substantial presence test (Form 8843).

Non resident Aliens: Substantial presence as a condition for taxation

A person who meets the "substantial presence test" for the calendar year is considered a resident alien and is therefore generally subject to U.S. tax. (Exceptions apply to exempt individuals with narrower nexus exceptions. A (positive) substantial presence test, which establishes a tax liability in America, exists if

the person 183 days during the current year

or 183 was physically present in the United States during the 3-year period that includes the current year and the 2 years immediately preceding it.

A teacher or intern who is temporarily in the U.S. on a "J" or "Q" visa and substantially meets the requirements of the visa.

A student who is temporarily in the U.S. on an "F", "J", "M", or "Q" visa and substantially meets the requirements of the visa.

A professional athlete who is temporarily in the U.S. to participate in a nonprofit sporting event.

◦ Days of presence in the United States because the person could not leave due to an illness.

During the year, a closer connection to a country other than the United States (unless you have a closer connection to two foreign countries;

a "tax home" there

Fiscal home in that country;

No steps taken toward lawful permanent resident status (green card) and no application for lawful permanent resident status (green card) pending

No intention to remain permanently in the United States

Student has substantially complied with immigration laws and requirements related to his or her nonimmigrant status

Student has not taken steps to change his or her nonimmigrant status in the United States

Student has a closer connection to a foreign country than to the United States

Foreign income

Income of students in the USA is tax-free if it comes exclusively from foreign sources. The most common forms are maintenance payments from parents or scholarships (DBA USA Art. 20 No.3).

Smaller domestic income from interest income from US bank, US savings and loan institutions, US credit unions and US insurance companies are also tax-free and do not give rise to a tax liability in the USA.

Caution: Even if you have no U.S. income and are considered a non-resident alien, you must complete and submit certain IRS forms. These include Form 8843, which proves that you are a student excluded from the substantial presence test in the U.S., which can give rise to tax liability.

Scholarship / Fulbright Scholarship

Scholarships, provided they are paid out by Germany and are thus considered a purely foreign source, do not give rise to any tax liability in the USA.

If portions of a German scholarship are taken over by the host country, care must be taken to ensure that it is a scholarship (Fellowship) and not a "salary" (Salary) and that it is declared as such. Only a fellowship is tax-free, whereas a salary must be taxed.

In Germany, the Fulbright Scholarship is exempt from tax according to §3 No. 42 EStG. If it is paid exclusively from a foreign source or falls under the above-mentioned requirements, it does not give rise to a tax liability in the USA.

However, care must be taken to ensure that scholarships cover only the cost of education at an eligible educational institution and are not designed for any advanced purposes. (Publication 970, 2020). Accordingly, they must not be too high, but only serve the educational purpose, otherwise they may give rise to a tax liability.

Difference Fellowship, Scholarship and Salary

"Fellowship" is a status within the university or research institute and may or may not include "financial support." Prestigious universities sometimes announce a "Fellowship" and provide only a desk with computer in the library. Many renowned researchers or public figures often apply for this particular position, willing to pay all other expenses themselves just to receive the announced "fellowship."

Scholarship always means that there is a "financial support" available. Thus, there is always financial support included through direct monetary benefits.

"Salary" means a salary paid to an employee who is on a company's payroll. It is usually compensation associated in exchange for the employee's services.

In the USA, a distinction is made between federal tax, state tax and local tax.

US Citizen

Resident aliens are treated as U.S. citizens for tax purposes

Green card holder

Nonresident aliens, with their U.S. incomes.

The tax reform "Tax Cuts and Jobs Act" came into force in the USA on January 01, 2018. The Act permanently reduced corporate tax rates to 21% and temporarily reduced tax rates for individuals until 2025. In addition, the tax reform includes a provision that states 100 percent immediate depreciation for movable assets. This provision expires in 2026. To prevent profit shifting by US companies, a tax was introduced - the Base Erosion and Anti-Abuse Tax, BEAT.

Saving clause and exception from saving clause

As a non resident alien you can claim a tax exemption. Once you decide to stay in the U.S. and become a resident alien, you generally cannot claim a tax exemption on income. This is because each country reserves the right to tax its residents as if there were no DTA, the so-called saving clause.

Exception: The DTA contains an exception to the saving clause. This exception allows international persons to continue to enjoy certain treaty benefits even if they have become U.S. residents or U.S. resident aliens for tax purposes. One can then still receive Fellowships tax-free even as a Resident Alien.

US Citizen:

A person who was born in the United States

A person born outside the United States (obtaining U.S. citizenship before age 18) if one parent or parents is or are a U.S. citizen at birth

A former alien who has been naturalized as a U.S. citizen. For example, persons who have lived in a common-law marriage with their U.S. citizen spouse for three years prior to the date of application for naturalization, or who have served or have served in the U.S. military for at least one year

A person who was born in Puerto Rico, Guam, or the U.S. Virgin Islands.

There is no federal sales tax in the United States. Sales taxes can be incurred by states (State Taxes), as well as at the local level of cities and towns (Local Taxes). State sales tax rates range from 2.9% to 7.25%. Local sales taxes range from 1% to 5%. Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) do not impose a sales tax, but local sales taxes may be imposed. The five states with the highest average combined rates of state and local sales tax are Louisiana (9.55%), Tennessee (9.54%), Arkansas (9.48%), Washington (9.29%), and Alabama (9.22%). Different sales tax rates may encourage consumers to shop across borders or purchase products online. For example, in New Jersey, groceries are taxed but clothing is not.

A business is subject to sales tax in a particular jurisdiction if it has a "nexus" there, i.e., a place of business, employee, subsidiary, economic presence, or other presence. Nexus is defined by the respective state.

The double taxation treaty between Germany and the USA does not apply to the tax law of the US states. Accordingly, it is possible that there is no U.S. federal tax liability, but that there is a sales tax liability of the respective state in which a business activity is carried out.

Sales or use tax rates vary from state to state and range from 2.9 to 7.25 percent. In addition to the federal rate, local governments in 35 states impose an additional sales or use tax ranging from 1 to 5 percent.

Amounts reported on the U.S. tax return are to be reported in U.S. dollars. If all or part of the salary was paid in foreign currency, or expenses were paid in foreign currency, the average exchange rate for the year is used. For foreign transactions on specific days, the exchange rate for that day may be used.

The 401 (k) plan is a US retirement savings plan. The contributor gives up part of his income and has it paid into the savings plan. (Other option is IRA individual retirement arrangement, where contributions are made by the beneficiary).

Starting at age 59 ½, the beneficiary can take withdrawals; starting at age 70 ½, the beneficiary must take withdrawals.

How is 401 (k) plan treated for tax purposes?

Contributions to such plans can be deducted from taxable income (exception: Roth IRA). In return, the payouts are taxable as income, so-called tax deferred. It must appear as ordinary income in the income tax return in the year it was paid out.

Disadvantages in the event of early or late payout

If the beneficiary wishes to make withdrawals without already being 59 ½ years old, an early withdrawal penalty of 10% is incurred in addition to income tax.

If, on the other hand, no distributions are made until the beneficiary is 70 ½ years old (required minimum distributions, RMD), a penalty tax of 50% of the amount that should have been paid out is incurred. The amount to be paid out depends on the accumulated assets and the statistical life expectancy.

Exceptions to the advance withdrawal fee

People with medical emergencies (ineligible expenses, medical expenses that exceed 10% of gross income), permanent disability

First time home purchase

Tuition and fees

Up to $100,000 to pay taxes that are due

If withdrawn from retirement plan and repaid within 60 days (indirect rollover)

When the money is contributed to a traditional IRA (direct rollover)

Corona Pandemic: In 2020, the 10% early withdrawal fee will be temporarily waived due to the passage of the CARES Act (the Act applies to withdrawals from January 01, 2020 through December 30, 2020). Eligible participants can make an early withdrawal (before age 59) of up to $100,000 from 401 (k) s, 403 (b) s, 457 s, and traditional IRAs without paying a 10% penalty.

There is a three-year grace period to pay the taxes on the early withdrawal or put the money back into a retirement account (versus the standard 60-day repayment requirement).

72 (t) Rule (should only be used in cases of absolute financial hardship): if none of the above exceptions apply, a schedule of annual (or more frequent) withdrawals from the retirement account (SEPPs) may be established. SEPPs are essentially equal periodic payments. When money is withdrawn from a qualified retirement account under Rule 72(t), the funds are distributed as SEPPs. These regular payments are made over a five-year period or until age 59. Requirements are:

◦ Minimum annual payments for 5 years or until age 59.

◦ Income tax on all contributions and earnings on their retirement account.

◦ No withdrawal from an account managed by an employer for whom they are still working. Retirement accounts at current job are not eligible for SEPPs