Taxes

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Earned Income

Social Security Benefits

Pensions

Capital Income (Passive Income)

Other Income

Other Reporting

“The difference between
the taxman and a taxidermist
is that the taxidermist leaves the hide.”

Mark Twain

DISCLAIMER

The information provided as to legal and tax issues on this website is general and may not apply in a specific situation. Legal and tax advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does the receipt of it constitute a lawyer-client relationship. The AGBC and the authors accept no responsibility for any acts or omissions contained herein. Although the information provided was believed by the author(s) to be generally accurate as of the date of first appearance on this website, be advised that legal and tax laws and regulations are constantly changing. The AGBC and the authors assume no responsibility for publishing any updates or notifying through the website of any changes in the legal or tax laws and regulations that may from time to time be presented here.

What is Taxed Where? Germany? America?

– a personal viewpoint –

Accept the fact that you have to pay taxes, but don’t pay more taxes than you are required to pay.  The basic document governing what is to be taxed where is the Double-Taxation Treaty (DTT) between the Federal Republic of Germany and the United States of America dated August 29, 1989, as amended by subsequent protocols.  The tax laws of both countries are not fully aligned with the Treaty, but if differences arise, the Treaty takes precedence.  For each category, you should not pay more in total than the higher tax rate of the two countries.  Also refer:  http://www.irs.gov/Businesses/International-Businesses/Germany----Tax-Treaty-Documents for details.

What is taxed where?  If you are a US citizen or resident alien, the USA demands the right to tax your worldwide income.  Double taxation is avoided by means of a system of Income Exclusions and/or Tax Credits. Remember that you must annually file a US tax return, even though it results in no additional tax liability to the US IRS.  Refer Publication 17, “Tax Guide for Individuals” for detailed guidance.

The AGBC is not qualified or authorized to do tax consulting.  However, AGBC Bonn Vice-President, Bob Robertson, offers a description of his personal experience with US and German taxes as general information.  Questions related to this article may be addressed to vp@bonn.agbc.de.

The following is general information for Americans in Germany based on my past personal experience.  It may not be current or correct in all points. If in doubt, talk to your local analyst at the German Finanzamt and/or to the IRS-advisers at the US Consulate.  Normally the IRS representatives in the States won’t have the slightest idea what you are talking about. 

Remember that while living overseas, you are allowed an automatic 90-day extension for filing your US taxes.  Unfortunately, the extension does not apply to interest charges on unpaid tax amounts. Keep an eye on your employer’s withholding for you, because it may not be enough for your taxes on your total income.  Submit Form 1040ES as appropriate.

Earned Income

You can exclude up to $100,800 (2015) of foreign job income from your US taxable income.  Use Form 2555.  This does not apply to “unearned” or “passive” income: dividends, pensions, Social Security, etc.

Social Security Benefits

These are only taxed in the country of residence.

  • US SS benefits – Use Form 8833 to exclude from your US taxes.
    Explain that the exclusion is related to the Double-Taxation Treaty, such as:  
    “US Social Security benefits  2015 = $ 565. I am a US citizen and resident of the Federal Republic of Germany since xxxx. Article 18  para. 5  (as amended by the Protocol of 1 June 2006, Article VIII) Social Security benefits paid by one contracting state to a resident of the other contracting state shall only be taxable in the other contracting state.”
  • German Social Security (BfA) benefits – Use Form 8833 to exclude from your US taxes.  Explain that the exclusion is related to the Double-Taxation Treaty, such as:
    “German Social Security (BfA) benefits  2015   EUR 4,000 = $ 5,565 - I am a US citizen and resident of the Federal Republic of Germany since xxxx. Article 21 para. 1: Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.”
    or, if you are not a US citizen,
    “German Social Security (BfA) benefits  2015   EUR 25,000 = $ 35,565 - I am a German citizen resident in the Federal Republic of Germany since 1935. Article 21 para. 1: Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.”

Pensions

US Military Retirement Pay is only taxed in the US (Article 19, para. 1.). However, it must be declared on your German tax return, and although not taxed directly, may be used to determine your German tax bracket.

Company Pension – “Pensions” as use in the Double-Taxation Treaty refers to public pensions.  Therefore, company retirement plans do not fall under Article 18, para. 1.

The IRS in Frankfurt advised me to include the amount on Form 1040, Lines 16a and 16b, and deduct the German taxes on the amount from my US tax burden using Form 1116.

Capital Income (Passive Income)

Both Germany and the US want to tax capital income.  For my taxes, I first declare the income for tax in the source country where it was earned.  I then declare it in the other country and offset the tax burden with whatever taxes I paid on it in the first country.  For US taxes on income from Germany use Form 1116 to deduct the taxes paid in Germany (25% tax rate).

  • Investment Funds – Income from such funds is taxable in Germany.  Charges related to individual transactions are deductible as costs.  Administrative or management fees not related to individual transactions are not deductible in Germany on personal income tax.  If your investments are a registered business, you may be allowed to deduct management fees as a business expense.
  • Dividends from the US – For non-US citizens, the US may tax @ 15%, Germany takes the rest. (Article 23).  US citizens are taxed at their normal US rate and then Germany takes the rest up to 25%. 
  • Interest – First taxed in country of origin and then in the other country.
  • Capital Gains on stocks – Germany had a preferential tax rate on stocks purchased before 2009, which I believe has now expired.  Both Germany and the US have limits on offsets for capital losses.  Capital losses can be carried forward.  If not sure, consult an expert. 

To avoid misunderstandings, I recommend that you include a copy of your US Form 1040 plus appropriate Schedules with your German tax return.

Other Income

Visiting professors and teachers have special treatment.  Refer DTT, Article 20.

Director’s fees; refer DTT, Article 16.

Artists and Athletes; refer DTT, Article 17.

Alimony and Child Support; refer DTT, Article 18.

Self-Employed

If you are working in Germany freelance and not covered by The Status of Forces Agreement or have other international special status, you should be in the German health insurance and social security systems in addition to paying German taxes.  If not, you are probably illegal!  This does not mean that you are criminal, only that you should correct the situation ASAP.  As with taxes, the system is designed to avoid paying double or receiving double benefits.  With constant changes in Social Security legislation, The Affordable Care Act, and many more, get professional advice.  A good starting point is the “Bundesversicherungsamt”. There are offices in most medium-size cities;

refer: http://www.bundesversicherungsamt.de/

Consult the IRS at the U.S. Consulate for help gaining exemption from the U.S. Self-Employment Tax.

Other Reporting

As discussed at the AGBC Bonn September meeting, the US Government now requires reporting on all financial involvement outside of the USA.  The requirement applies to all US citizens, resident aliens, businesses, and more.  The penalties (even for unintentional mistakes/oversights) are drastic.  The following only describes how I handle the reporting for my personal situation.  I strongly suggest that anyone reading this study the instructions for the two forms to be absolutely sure how each applies to your personal situation.  The links shown on the IRS forms don’t work for me, so I access http://www.irs.gov/ directly and then search for the form/instructions that I need.

My personal situation is that I am a US citizen, my wife is German, and we file joint returns for both US and German taxes.  We have joint checking accounts in Germany and in the US; my wife has investment accounts in Germany and I have investment accounts in the States.

 

Foreign Financial Account Reporting (FBAR) – TD F 90-22.1.

Who must file?  
US citizens, residents, businesses formed under the law of the United States, US trusts or people with signature authority over foreign financial accounts with a total (of all accounts) value exceeding $ 10,000 at anytime during the tax year.        

What accounts? 
Foreign bank accounts, brokerage accounts, trusts, insurance policies with cash values, etc.

When and where to file?
June 30th for the previous year – not to be filed with tax return. Since 2013 filing must be done on-line.

Penalties!
Failing to file: $ 10,000 for each violation. 

Because the total value of our German checking account and my wife’s financial accounts exceeds $10,000, we filed forms TD F 90-22.1.

ATTENTION:  The IRS at the Frankfurt Consulate advised (Jan. 2014) that FBAR reporting is now only allowed online using FinCEN Form 114.  For Help please contact: Tel. 001-866-346-9478 as well as Tel. 001-313-234-6146 or e-mail: BSAEfilinghelp@fincen.gov.  The IRS personnel in Frankfurt are currently not allowed to advise on FBAR reporting.

 

Additional Reporting Requirements  - Form 8938

Who must file?  Specified individuals such as US citizens, residents, green-card holders, owners/part-owners of foreign businesses, etc.  There are also threshold amounts that are different for the maximum amount during the year and the amount at year-end.  As if that were not enough, the amounts also vary according to whether your tax home is a foreign country and whether you and your spouse file separately or jointly.  It is very complicated, so I can only advise you to study the IRS instructions very carefully to determine what applies to your personal situation.

When and where to file?
Forms 8938 are filed with your income tax return. 

Penalties!
Failing to file: minimum $ 10,000 for each violation.

Because the total amount of our foreign investments is below the threshold amount for our situation, we do not have to report.

All forms and instructions are available for download at www.irs.gov.

 

Exchange Rates

What exchange rate to use?  I use average USD/EUR exchange rates for my tax reporting.  If your income “steady” e.g., derived from a business, salary, Social Security, interest, etc., then the average rate is quite appropriate.  However, for one-time trades – sale of a house or a business, big stock trades, you might want to use historic exchange rates for that item.

Because it’s easy to use, I use Oanda (http://www.oanda.com/lang/de/) as my source.  It’s not perfect, but it offers exchange rates (both USD->EUR and EUR->USD) by day, week, year and/or average for the period.  I use the “credit card rate” to simulate the transaction charges I have to pay when I move funds across the Atlantic with my credit card.  Neither the German nor the American authorities have ever questioned this practice.

 

Edward B. Robertson
AGBC Bonn e.V.

15 Nov 2015

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