Expat taxes (USA)

Thanks Beppi. That fits my husband's explanation: "Because they can." Lovely. I've been considering renouncing my citizenship for quite a while, and I just keep racking up the reasons. The only things holding me back are that the US (of course) makes it very expensive (something like $2500, last I read) and that eventual inheritance for my American kids becomes expensive and complicated if I renounce.

That, too, are rules made for obvious and valid reasons.

OK, I'll try to give you an answer but this is a bit subjective rather than just giving technical information.  By the way, if you need more specific advice then I can possibly help you as I am an American who has lived overseas for decades and have a degree in Finance.

Theoretically one has the honor and advantage of being a citizen of the greatest country on earth (sarcasm intended) and you get to pay for it. And they can get away with it. That’s pretty much it.

That said, let me give you an overview of the situation. I know people who just ignored the situation and never filed. As long as they never went back to the States or later wanted to collect Social Security then they had little to fear. But it’s kind of burning your bridges. One never knows if they will eventually cross check information and then for example when you need to get a new passport, it will trigger an audit…

I cannot recommend doing anything illegal but I’ve heard that the IRS is undermanned which means they are generally limiting their auditing efforts on big catches rather than chasing down some guy overseas for a few bucks. But this situation can change and with computers they can figure out a lot of things with no man hours spent. The other thing is that one of the IRS’s best weapons is fear. People comply with rules fearing to do otherwise or that someone with a grudge will whistle blow on them. In the past, the IRS deliberately targeted people for minor offences and smacked them with big penalties. The intended reaction is that people won’t dare to underreport or not file when they see someone crushed for having cheated onto the tune of a few dollars. And then they made sure it got a lot of media attention.

Filing is a pain in the ass but the situation is not as bad as people might think. I file but never have to pay any additional taxes to the States. If you have foreign residency and don’t do any business in the States then you should qualify for the Foreign Earned Income Exclusion which exempts (approximately as the amount charges over time) the first 100,000 dollars of income.

I’ve personally never earned above this amount. The catch is that one HAS to file to take this exclusion. One cannot just say; oh, I won’t owe anything so I don’t have to file. And I don’t think (but am not sure) that this exclusion can be taken later. If so; if one eventually has to file back returns then they might end up paying tax on income that would have been excluded if filed on time. Sounds crazy to me that some people will be too lazy or out of ideology refuse to file with the risk that they might later have to pay lots of unnecessary taxes and penalties (possibly prison for obvious fraud) , plus the fact that they live under the threat of being discovered. The IRS doesn’t work on trust. They want to collect and if needed control your financial information.

On top of that there is the Foreign Tax Credit where they would subtract the taxes you already paid in Germany from any additional tax liability. So basically, if your tax rate in Germany is as high as your American one – you won’t pay anything in addition. There are also deductions for people who had international moving expenses or for the maintaining of an additional property due to war conditions in certain countries. I don’t know much about these actual deductions as I’ve never had the situation that they were relevant to me.

The IRS does actually give all overseas filers an automatic 2-month filing extension. One has to report to the IRS in dollars which for many businesses means keeping a double set of books which is an amazing amount of extra work. I just do my entire book keeping in German and in Euros to do my German taxes. Then I take the totals of the relevant categories, figure it out in dollars and fill out the 1040 and needed attachments.  I have heard of Americans that gave up their citizenship because they could not afford to pay an accountant that was qualified in these matters  to fulfill the IRS requirements.  I’ve heard that the IRS has proposed a law that for tax purposes they would continue to oblige former Americans to file! Sounds like a violation of international law but on American soil what can one do if they claim that they still see you as an American person – but just for tax purposes. If you didn’t think big brother would arrive you are mistaken because he is already here.

If one has self-employed income then one is normally subject to American Social Security taxes (even overseas) which for self-employed people is over 15%. But there is what is called a totalization agreement between Germany and the USA that will exempt you from this if you are paying into the German system. One needs to get a document every year from the Deutsche Rentenversicherung Bund in Berlin called the called the Bescheiningung D/USA 101 A. This should be attached to your 1040 as proof of your exemption from Self-employed Social Security taxes. Don’t forget to request the form on time as it usually takes some weeks to a month. They do NOT just automatically send it. And even finding their address and email is difficult. The Berlin office changed their email address last year, unannounced, and I didn’t get my form and couldn’t reach them on the phone as the number no longer worked. There just happens to be an local office of the DRB in my neighborhood and even they could not definitely find the new email or telephone number for the appropriate department! They did find a number in Berlin where I found out but somehow such information is treated as top secret and not listed publicly.

I never found out if the office in Berlin had actually moved or if they just changed their tel., fax and email. The address I have for them is BFA Abteilung USA, BKZ 5565, Ruhrstr. 2, 10704 Berlin. The fax number to send the request for the D/USA-101 A as of 2016 is: 030 86 56 83 39

Independent of having to file Income Tax returns, one also has an annual obligation to separately file another document  called the TD F 90-22.1 Report of Foreign Bank and Financial Accounts aka FFBAR.
This can be filed online. Basically if you have more than 10,000 dollars in financial assets of any kind then they want all of the details like how much, what kind of investment it is, at what institution(s).  Failure to report can eventually lead to penalties or confiscation. They don’t even care if all of this money was reported as income and already as it was earned. The background of this strategy was supposed to be to fight people hiding money overseas. But it steps on the toes of Americans actually living overseas.

The IRS has imposed many rules for financial institutions all over the world to report the holdings and earnings of any Americans. Thus they can easily cross check the information now. And banks in Switzerland for example got fined hundreds of millions for not properly following the rules. Because of this it is virtually impossible as an American to open a foreign bank account, except in a country you have legal residency in.  So if you live in Germany, you can get an account there but all your information is given over to the IRS. And even if you have legitimate business dealings in neighboring countries like Switzerland or France - you will not likely be able to have an account there.

What annoys me about this situation is that one can get penalized not for illegal activity but they criminalize not handing over information about legal assets. And the reality is that such rules probably don’t stop the mega rich from hiding their money. They just stick it the few places that are existing tax havens like Macau or the Cayman Islands or they set up sophisticated trust funds or incorporate with mailbox companies registered abroad and thus go around all of the restrictions.

This link takes you to an article written by a US attorney on this matter.

The following persons have to file US income tax returns (regardless where they live):

◾ US-citizens (also if they have a second citizenship)
◾ Green Card Holders
◾ US residents who fulfill the requirements of the "substancial present test"
◾ Nonresidents who receive income from US sources (nonresident aliens)

For individuals who did not filed US tax returns so far the IRS offers a special sceme free of penalties (streamline foreign offshore procedure).

To me it looks like the US want to keep controll over their citizens and "lawfull permanent residence" regardless where they live.

Peter Scheller

Peter Scheller’s information above is correct as to who has to file under US tax code. Yet such people would NOT have to file if they did not have income above certain minimal limits.

For example, a single person under age 65 with less than 10,350 dollars or a married person filing jointly with less than 20,700 dollars – or a married person filing separately under 4,050 dollars. More details can be seen at this link:

https://www.irs.gov/publications/p17/ch … 1000170392

Like I mentioned in my previous post, one HAS to file to get the Foreign Income Exclusion. So if one bases this taxable income level on having taken the exclusion, one has to file - even if the end income is below these minimum limits.

The other problem is if one is self-employed. Since Social Security (S.S.) taxes are figured already on the first dollar earned, one would in effect have to file regardless of income level if self-employed. If working in a country like Germany that has a totalization treaty with the US, one will in the end not have to pay any US S.S. taxes BUT one must file and document that they are covered under the local government’s S.S. program.

In conclusion, if one is not self-employed but has a job earning less than the minimal amounts, then one could skip even filing. )

Wow! You seem to know this mess inside and out, Tom.

Here is a complication: U.S.-based side- or self-employed income while living abroad.

What if one earns at least SOME of one's income from a U.S. based company, say some online publisher or donations collector while living (and possibly working one's main job) abroad, such as in Germany?

That company will send the IRS the equivalent of the W2 or 1099 it sends to the individual. Can the foreign (German) taxes on such earnings still be deducted in one's U.S. tax filings or included in the ~$100,000 exemption?

Since you mentioned that Social Security payments must be made on any "self-employed" income, as which such online income would probably be interpreted, this might get even more complicated?

Somehow I can't see how to avoid double taxation on such income. Germany (or whichever country) will want to tax it because one lives there, and the U.S. (and any number of U.S. states who insist that the expat still belongs to them) will want to tax it for one being a U.S. citizen and that W2/1099 info having been submitted to them by the U.S. based institution.

So, how to handle such a neither-fish-nor-flesh income in this tug of war among nations?

This is something on which I have not been able to find ANY info on the net. It'd be great if you could bring some clarity into that particular murkiness. :-)

Hi Dirksome. Good question. It is a tricky scenario you’ve proposed and I have to admit I don’t have all of the answers. I got my degree in Finance in the States and have been living abroad for decades so I have both experience and a lot of underlying knowledge of the subject. But I have not been in such a situation as you describe. The Foreign Earned Income Exclusion has always negated any US tax liability for me so that I’ve never needed to take the Foreign Tax Credit.  The first thing I would say is that it is obviously better to have a clear situation of where one resides and where their income comes from.

Anyway, any US earned income cannot be included under the Foreign Earned Income Exclusion and yes, it needs to be included in German tax returns if you live there. This is certain.  If one would end up owing US tax on such US earned income while living in Germany, it  would depend on a number of factors. The first would be the amount. If it is under say 8,000 dollars then one would still be under the minimal income level when figuring in deductions and exemptions for most people. If it is more then there could be a tax liability. But income taxes paid in Germany can also be offset by additional tax credits taken on your US returns.

Here’s where it gets tricky and I would recommend anyone in such a situation to get professional help for at least the first year as there could be some details I am not aware of. One would have to figure out how much of any Germany tax liability is based on the US based income. One cannot include the tax on foreign earned monies already exempted. But if say a 35% tax is being taken on that US income by the Germans and the US would be levying a 40% tax, then the tax credit would not cover the whole amount and the US would end up taking an additional 5% on top of the 35% taken by the Germans. If the amount of tax from the Germans is more than what the US calculates then the tax credit should offset all of the liability to the IRS.

Here is a link to the IRS page about foreign  tax credits. By the way, don't make the mistake of going to irs.com because this is a commercial site that wants to sell tax return services. It tries to appear as the official government site but isn't!

https://www.irs.gov/individuals/interna … tax-credit

About the Social Security I am more uncertain. If living in Germany the US earned income must be reported and the German social security tax equivalence applied. In Germany this is all done separately from income taxes. But if covered under the German system one is exempt from US Social Security and in this case I believe (but am not sure) that this will apply to the US earnings as well. The whole idea of the totalization treaty is that one pays into one system. And the IRS cannot claim you are cheating in any way since the Germans are taking their cut while providing the coverage. And if you are considered self-employed then the money being paid in America should not have Social Security withheld. If they are, for whatever reason then it gets more complicated.

I don’t have time at the moment to research it more but you can look at the www.IRS.gov site and maybe find more information about the details of the totalization treaty.