Exemption - Net Investment Income Tax

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Exemption - Net Investment Income Tax


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Old 5th April 2020, 05:54 PM
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Default Exemption - Net Investment Income Tax

Dear All,

I earned over 125 USDk for the first time in 2019 and also had over 6 USDk in capital gains (interest income, dividends and realized gains on stock). I am an American but permanent resident in Germany. This means I am facing a new tax on my US tax return this year - the Net Investment Income Tax (NIIT). I am also married filing separately meaning the 125 USDk is relevant.

I have read on several forums that I can exempt myself from this tax since Germany and the US have both a tax and social security treaty. Also, I have found that a form 8833 and form 1040-NR would be needed. However, I am unsure how it truly works. Do I only fill out a 1040-NR or do I still need a form 1040 for my usual employer income and the foreign tax credit? And do I only put my capital gains on the 1040-NR or on both forms? Or only the deduction on the 1040-NR? Also, I have never completed the form 8833.

Any help would be greatly appreciated! The US Government likes to make these things as complicated as possible...

Thanks!
AmiGermany

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Old 5th April 2020, 10:55 PM
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If you are a US citizen then you would fill out 1040 not 1040-NR

I am not so sure that NIIT would be considered a social security tax for the purpose of totalisation agreements.

Most totalisation agreements specifically mention that the scope being restricted to Chapter 2 of the IRC. NIIT has been introduced as a separate chapter ( 2A ) and not a section under Chapter 2. I have seen other rulings that use the chapter number to definitively include / exclude for treaty benefits.

Further, excruciatingly, because the scope of income tax treaties are typically limited to Chapter 1, NIIT would not be eligible for foreign tax credits because it is not a Chapter 1 tax.

If both of those positions are true, it may well be that you cannot exempt yourself from this tax... For your sake I hope I am wrong.

I am sure I have seen some NIIT rulings.. will try to dig them out and prove myself wrong.

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Old 6th April 2020, 07:31 PM
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Hi Moulard,

Thanks for the quick response! I've done some more research and I'm afraid you're right. I thought I could be excluded from NIIT as a dual-resident, but determined only "Aliens" can be considered dual residents... Therefore, not on the list of who can waive the NIIT. Do let me know if you find anything else, though! Thanks again for your help - quite annoying that the whole tax topic is so difficult when you live abroad...

Kind regards,
AmiGermany

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Old 7th April 2020, 12:10 AM
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It is pretty clear that the position of the IRS is that NIIT is not covered by social security agreements (totalization agreements) - but of course that will be their position.. they will not readily deny themselves any income that they can get away with.

That said, I have read on other forums and blogs about people who have made a treaty based claim that it is covered by a totalisation agreement.

They have generally had those claims rejected by the IRS in the first instance, but the IRS has backed down on appeal.

Clearly there is a risk associated with a treaty claim on this and if the IRS held its ground, really the only recourse you would have is through the German Competent Authority.

Either way it isn't going to be pretty.

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Old 8th April 2020, 06:56 AM
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Hi Moulard,

Thanks for the additional info. In other words - if I had more time, a friend who was a tax lawyer and my tax liability was going to be more than 200 - 500 USD per year it may be worth it Looks like I just have to deal with the consequences of our complicated tax system and hope someday it will somehow change for foreigners... Thanks again!

Kind regards,
AmiGermany

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