American filing American taxes for the first time since moving...

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Hello everyone,

 

I hope this is a relatively simple question but I feel sheepish about not asking it much sooner. I did search the forums I just need a bit of reassurance.

 

I have been living and working in Germany since September 2013.  Except for two consecutive months in 2013, I am employed just like any other non-selbständig German paying  taxes, health insurance, and church taxes. I am legally single, without kids and full time so I am at the upmost bracket.  No complaints. Brutto here, over a 12 month period I earn 28,000 Euros.

 

I am engaged to a German and will live here over 5 years for sure :)

 

I did not file US taxes because I believed that earning under 60k I was not obliged to do so. My undestanding *now* is that I should still file. I feel dumb. 

 

I have no taxable assets and do not draw any kind of insurance or social assistance in the United States. 

 

I have however, paid 25,000$ towards my student loans over the last two years (...I want that monkey off my back) and 14,000$ or so of that is interest.

 

Please advise. Can a person simply file online with HR Block (or another service) and what form(s.) Will I need to provide anything from the German side of things such as lohnsteuerbescheiningungen for the last 2-3 years.

 

Thank you :)

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I'm sorry to piggy-back on your question, but I'm in a similar situation with back taxes, so this feels like a good place to add a follow-up question.

 

In my case I'm having trouble justifying the processing feeds charged by online tax services for Expats when I know without a doubt that I always fell under the earned income tax credit and, for some years as a student, had a gross income under $8,000 (or the equivalent in euros). Paying $200-300 a pop for each year of back taxes seems nuts, but I'm not sure where or how to begin the process on my own.

 

Has anyone been in a similar situation? If so, what did you end up doing? Online filing like NativeFraulein suggests, or sending one big tax packet to the IRS, or visit a specific tax consultant?

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I've never filed late and I don't do other people's tax returns for a living, but I'd magine that you can still download the relevant tax forms and instructions for each past year online (I don't owe taxes, can I file electronically after April 15th). One thing you may want to ascertain is whether you can take the earned income exclusion when you are filing more than a year late or have to use the credit for foreign taxes paid.

 

Alternatively, you can pay someone to one year's deliquent return and then extrapolate what you need to know to do the other ones from what they complete.

 

One caveat here- if you had any significant income other than that from a job as an employee, I would suggest finding someone in the US experienced in doing deliquent returns.

 

A bigger concern than deliquent returns may be deliquent FBAR/FINCENT forms reporting any foreign bank accounts if they ever has a total balance of 10K USD at least once during a calendar year.

 

Disclaimer: nothing in this post should be construed as legal, tax, accounting, or financial advice. Please consult licensed experts in the relevant jurisdiction(s) for that.

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According to the IRS, tax returns may be electronically filed for the current year (2016) and the two prior years (2015 and 2014).  Earlier delinquent returns (e.g. 2013) must therefore be filed on paper. (An envelope and a stamp will also be required.)

 

The election to exclude foreign earned income must ordinarily be made on a timely filed return.  Nevertheless, there is a special regulatory provision that allows the election to be made on an untimely return.   The instructions on how to do this are on Page 20 of Publication 54 ( www.irs.gov/pub/irs-pdf/p54.pdf ).  Even if for some extremely unusual reason you cannot avail yourself of this special exception, you will likely be able to reduce your US tax liabiltiy to zero by using the foreign tax credit.

 

If you have children that might qualify you for the refundable child credit, it is usually best NOT to exclude foreign income under IRC §911 since by doing so you exclude the earnings that might otherwise qualify you for the refundable child credit. By claiming the FTC instead, you usually get your taxes to zero anyway and get a nice fat check from Uncle Sugar in the amount of $1,000 a head for any qualifying minor human units you may have crawling or lounging about your home.

 

Penalties for late filing and late paying are relevant only if an amount of tax is actually due for that year because both penalties are computed as a percentage of taxes owed or not timely paid.

 

The fee quoted @derHolzmann is neither unusual or unjustified, i.e. it is typical and should be regarded only as a MINIMUM for professional tax return preparation for persons in his predicament. 

 

All forms necessary for doing it yourself are available at the IRS website:    www.irs.gov

 

Just takes time - lots of it - and patience. And drugs. Did I mention drugs?  But, not only will you be rewarded with lower costs, you will also learn stuff that will help you make sense of the financial world you live in now and the substitute for it that your Congressperson is going to propose for you in the very near future.

 

 

 

 

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Hello again everyone,

 

Thank you so far the answers to my question, I am glad I am not alone on this one. 

 

When I was in the USA ; I always did an online filing with Turbotax or HR Block. It was a simple procedure because I am single without dependents or taxable income. I took myself as one deduction and deducted my student loan interest (which ironically was paid back into the student loan when refunded :P .)

 

Can I still do that now or must I do the paper forms? I also am clear on how to state my income if, obviously I don't have W2 forms to supply. Do I simply write my yearly gross income as converted into dollars? Or must I provide additional proof.

 

Thank you everyone, I am glad this is also helping others :)

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@NativeFraulein

 

As previously stated, it is too late to electronically file your 2013 returns.  2014, 2015 and 2016 remain possibilities but you will have to check with Inuit or H&R Block to confirm that.

 

If you elect to exclude your foreign earned income, you will not be deducting any portion of your student loan interest.

 

If you have no other income to report, you will have to fill in a 1040 and a 2555EZ for a total of 3 pages of paper per filing year.

 

You can even file all 4 years in the same envelope.  The postage may be greater but if you use the IRS's free forms, the expense will be a lot less than DIY software. 

 

HELPFUL HINT:  if you file more than one year in an envelope be sure each year is separately stapled from the others and you include a cover sheet on which you write in big bold colorful letters - crayon works well:  

 

"ATTENTION!!  THIS ENVELOPE INCLUDES RETURNS FOR MORE THAN ONE YEAR!!!"

 

The answers to your other questions may found here:  Publication 54  www.irs.gov/pub/irs-pdf/p54.pdf

 

 

 

 

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Hi Straightpoop,

 

You've provided some great information above. Thanks! 

 

I'm dealing with my taxes for the first time in over 3 years. Some of the (surprising) conclusions I came to match what you say here, so it's good to see I am on the right track. 

 

I have a couple questions, that I think this you or someone in this thread might be able to answer, but first it is probably useful for others which stumble in if I post some of what (I think) I have learned so far. Please keep in mind that I have no US or German tax training of any sort, everything I write below might be wrong! Also, please correct me if anything is wrong:

 

  • A) If you have kids, there is a very good chance that Uncle Sam will pay you up to $1400 for filing your year 2018+ taxes, assuming the following: 

    • You do not file form 2555 foreign earned income exclusion. It is easier to do, if you qualify, but you are not eligable for child tax credit.

    • You file instead for form 1116 Foreign Tax Credit, which lets you deduct up to the entire amount of German taxes from what you owe in America. If you do, then you are a normal tax paying American, and can take advantage of normal tax credits, including the $1400 refundable part of the new 2018 child tax credit. (Refundable means that if you ultimtely owe $0, you will get $1400 free refunded to you!)

    • Your final German tax bill is higher than what you owe in the US, meaning that you can use Foreign Tax Credit to offset the entire US bill. (Anything paid in Germany above the US bill can be carried over for up to 10? years, which could be helpful if your situation changes, (ie income increases, etc) in the next years.     

    • You don't earn more than $200,000, and you let's be honest, you don't. You would definitely be paying someone to do this crap for you if you earned that much.

  • B) Filing late is mostly okay, as long as you do not end up owing money. The penalties for filing late seem to be pretty high, but are only calculated as a percentage of what you owe. (Maximum seems to be 25% of what is owed plus 5% interest compounded daily. (Nonetheless after three years 0.25x$0 + $0x(1+0.05/365)^(3x365) is still equal to $0). Note, I did read somewhere that the IRS sometimes automatically files on behalf of people who do not file themselves. That might be bad. I hope they didn't do that to me.

  • C) It seems like you can deduct a lot of (but perhaps not all of) the same types of things you would have back home, such as mortgage interest, business expenses, etc, even if you home loan is for a German house with a German bank. Someone please correct me if this is wrong.

  • D) IRS provides USD<->EUR conversion rates for each year

  • E) I think you are right about drugs being required to figure all this out, this is rough!

  • F) Also, side note... If you have not filed the FBAR this year and/or in the past. DO IT. Now!!! And do yourself a favor and do not look up the penalty for failing to file. Just fill it out, and hope they don't notice that it is missing. 


Now for a few questions:

  1. My wife (German) and I (US citizen) are "Married Filing Jointly" here for German taxes. For a few different reasons (mostly, just resenting this whole process, and not wanting to drag her into all of this), I would like to file "Married Filing Separately" in the US. (Although, filing jointly does have its benefits in the US, and we are lucky enough that she has a SSN, so I might do "MFJ" in the end, after all). Is it even possible for me to do "Married Filing Seperately" in the US, if my German tax burden is calculated as MFJ? How can I extract my portion from our jointly calculated german tax bill in order to put it on form 1116? Assuming there is a way to calculate my personal contribution, does Steuerklasse effect anything (I assume not)?

  2. How does one go about proving German income and taxation to the IRS, I obviously do not have a W-2. Do I have to provide proof of any sort, or does the IRS already know everything and therefore "trust" my provided numbers?

  3. Is it correct to assume 1) that German income tax is almost always higher and 2) therefore without taking any deductions in Germany into account I will always be able to keep my US tax bill at $0 using the foreign tax credit? and 3) The more deductions I have in Germany, the higher risk I have that not all will apply to the US tax bill, meaning high deductions in Germany could lead to having to pay US taxes. 

  4. From IRS Publication 54: “If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax”.  Is the monthly child subsidy we get in Germany affected by this?

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19 hours ago, here_in_deutschland said:

A) If you have kids, there is a very good chance that Uncle Sam will pay you up to $1400 for filing your year 2018+ taxes, assuming the following: 

  •  

    • You do not file form 2555 foreign earned income exclusion. It is easier to do, if you qualify, but you are not eligable for child tax credit.

       

    • You file instead for form 1116 Foreign Tax Credit, which lets you deduct up to the entire amount of German taxes from what you owe in America. If you do, then you are a normal tax paying American, and can take advantage of normal tax credits, including the $1400 refundable part of the new 2018 child tax credit. (Refundable means that if you ultimtely owe $0, you will get $1400 free refunded to you!)

       

    • Your final German tax bill is higher than what you owe in the US, meaning that you can use Foreign Tax Credit to offset the entire US bill. (Anything paid in Germany above the US bill can be carried over for up to 10? years, which could be helpful if your situation changes, (ie income increases, etc) in the next years.     

       

    • You don't earn more than $200,000, and you let's be honest, you don't. You would definitely be paying someone to do this crap for you if you earned that much.
  • b ) Filing late is mostly okay, as long as you do not end up owing money. The penalties for filing late seem to be pretty high, but are only calculated as a percentage of what you owe. (Maximum seems to be 25% of what is owed plus 5% interest compounded daily. (Nonetheless after three years 0.25x$0 + $0x(1+0.05/365)^(3x365) is still equal to $0). Note, I did read somewhere that the IRS sometimes automatically files on behalf of people who do not file themselves. That might be bad. I hope they didn't do that to me.

     

  • C) It seems like you can deduct a lot of (but perhaps not all of) the same types of things you would have back home, such as mortgage interest, business expenses, etc, even if you home loan is for a German house with a German bank. Someone please correct me if this is wrong.

     

  • D) IRS provides USD<->EUR conversion rates for each year

     

  • E) I think you are right about drugs being required to figure all this out, this is rough!

     

  • F) Also, side note... If you have not filed the FBAR this year and/or in the past. DO IT. Now!!! And do yourself a favor and do not look up the penalty for failing to file. Just fill it out, and hope they don't notice that it is missing. 

     


Now for a few questions:

 

  1. My wife (German) and I (US citizen) are "Married Filing Jointly" here for German taxes. For a few different reasons (mostly, just resenting this whole process, and not wanting to drag her into all of this), I would like to file "Married Filing Separately" in the US. (Although, filing jointly does have its benefits in the US, and we are lucky enough that she has a SSN, so I might do "MFJ" in the end, after all). Is it even possible for me to do "Married Filing Seperately" in the US, if my German tax burden is calculated as MFJ? How can I extract my portion from our jointly calculated german tax bill in order to put it on form 1116? Assuming there is a way to calculate my personal contribution, does Steuerklasse effect anything (I assume not)?

     

  2. How does one go about proving German income and taxation to the IRS, I obviously do not have a W-2. Do I have to provide proof of any sort, or does the IRS already know everything and therefore "trust" my provided numbers?

     

  3. Is it correct to assume 1) that German income tax is almost always higher and 2) therefore without taking any deductions in Germany into account I will always be able to keep my US tax bill at $0 using the foreign tax credit? and 3) The more deductions I have in Germany, the higher risk I have that not all will apply to the US tax bill, meaning high deductions in Germany could lead to having to pay US taxes. 

     

  4. From IRS Publication 54: “If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax”.  Is the monthly child subsidy we get in Germany affected by this?

     

 

 

Your understanding of the advantages of not claiming the FEI exclusion are essentially correct.  The obvious one is the "refundable child credit" (similar in effect to Kindergeld) which requires you to have certain threshold amounts of employment or self-employment income included in your MAGI (modified adjusted gross income.)

 

While it is true that German taxes will likely exceed your US income taxes on the same amounts of income thus making it worthwhile to claim the foreign tax credit, you must bear in mind that the FTC must be computed separately on different "baskets" of income.  The one that most people think about is the "general limitation" basket that includes wages, pensions, self-employment, etc. but the taxes paid to Germany on those types of income do NOT offset taxes on income in the so-called "passive" basket.  This includes foreign source dividends, interest, gains and rental income.  Rental income is the only one of the aforementioned "passive" items that are exposed to the full fury of the German income tax system.  The rest are classified as "Kapitalertrag" and taxed under the Abgeltungsteuer at a maximum of 26.375%.  But don't forget:  until you have at least €1,602 of joint KAPSt you have zero German taxes to offset your foreign-source "passive" income.  And, although Art. 23 (5) of the treaty will allow you to resource some US-source passive items (e.g. interest) significant US source items such as dividends and rental income will remain US source and thus ineligible for offset by foreign taxes.

 

Late filing and late penalties are computed as a percentage of what is owed and so, you are correct, late filing a return in which either nothing is owed or a refund is due will be penalty-free (provided any amounts owed were paid prior to April 15).  Filing late is, however, technically a no-no, is a bad habit to get into, mostly unnecessary and should be avoided whenever possible.  You don't have to wait for a Steuerbescheid from the FA to compute your German tax liability.  The Steuerermittlung generated by your Steuerberater or the software you use to file your German return are satisfactory.

 

Yes, itemizable deductions are largely independent of where you live but the new limits on deductibility introduced by the TCJA will make it difficult for you to come up with itemizable deductions in excess of the $18,000 standard deduction for head of household or $24,000 for married filing jointly.

 

FBAR:  you have the right attitude.  Just file the stupid thing.  There is little or no evidence that FINCEN or anyone else at the IRS or Treasury gives a rat's patootie about FBAR unless you are in their sights for major tax evasion prosecution.  By and large the IRS and government in general is uninterested in enforcing penalties that they cannot assess automatically, i.e. without going to court or being otherwise forced to expend their increasingly scarce resources.  When filing your "catch up" FBARs proceed as follows:

 

U.S. persons who inadvertently failed to file FBARs but properly reported all income related to their foreign financial accounts on their U.S. tax returns and paid all tax can take advantage of a penalty-free option currently being offered by the IRS. Delinquent FBARs can be filed on a penalty-free basis if two further conditions are met: (1) the U.S. person is not under IRS examination (or criminal investigation), and (2) the U.S. person has not been contacted by the IRS about missing FBARs. The delinquent FBARs should be filed electronically using the BSA E-Filing System (or other approved electronic system). Because there is a six-year statute of limitations for FBAR penalties (regardless of whether an FBAR is filed), the relevant years for missing FBARs are currently calendar years 2012-2017 (with the statute for 2012 closing on June 30, 2019). FBARs filed under this delinquent submission procedure should select “Other” (in the drop-down menu) as the reason for the late filing on the cover page of the electronic form. Selecting “Other” will open a window that will allow the delinquent filer to provide a statement indicating that the criteria for penalty relief have been met: The filing failure was inadvertent; all income related to the foreign account(s) has been reported; all U.S. income tax has been paid; and the late FBAR is being filed before IRS contact.

 

 

 

 

Conversion rates: 

Don't bother with the IRS/Treasury's reported rates unless you are trying to reduced the USD value of income denominated in a foreign currency. The Treasury's rates seem to always exaggerate the real value of the USD.  There are several more reliable alternatives that are much easier to use and more flexible.  The best is the ECB's:

 

https://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference_exchange_rates/html/eurofxref-graph-usd.en.html

 

Another very handy publication (in .pdf format useful for record keeping) is the monthly Bundesbank Devisenkursstatistik.  (no link.  Just Google it.)  It provides monthly averages for the past several years plus annual average and "last day of the year" rates for the last 15 years.

 

"XE" is a currency trading website that is also useful for historical cross rates:  www.xe.com

 

The IRS doesn't care what rate you use provided it is arguably reliable and you use it consistently.  Pick one you like and stick with it.

 

 

 

Your questions:

 

1.  Filing status:  You have 2 choices:  1) Head of Household (assumes your wife is a NRA) and you provide more than 1/2 the support for your children or 2) jointly by filing an election - joined by your wife - under IRC 6013(g) for your wife to include and be taxed on her worldwide income by the US.

 

Of the two, I would recommend you go with HoH.  The standard deduction is $18,000 as opposed to $24,000 for joint and may be all you need to eliminate your US tax burden while simultaneously claiming the refundable credit.  Filing jointly may be advantageous but remember: if it ever ceases to be advantageous and you revoke the election you can NEVER do it again either with your current spouse or a future replacement spouse. So hold it in reserve against the day when you really need it.

 

Also, by keeping one spouse safely out of the clutches of the US tax system you can structure your family investments for maximum flexibility, e.g. your wife can hold foreign ETFs and funds in her name ALONE without fear of having to deal with the PFIC rules. (The German rules are bad enough but with a German brokerage account the accounting burden is shouldered by the bank.)  She can also hold the US source income generating investments while you put your money into foreign-source income producing investments. That way, if and when you get hit with KAPESt. at least some of those taxes will be creditable for the "passive" income bracket on your US tax return.

 

2.  Computing your share of family taxes. 

Extracting "your" taxes from your wife's is a simple mathematical allocation exercise. Look at your German joint "Steuerermittlung".  You will see that it tracks two separate income streams (His and Hers) before totaling them both and then adding them together for a figure known as "Gesamtbetrag der Einkünfte".  Your share of whatever "tarifliche Steuer" is eventually computed on that income is the ratio of your "Summe der Einkünfte" over the "Gesamte".  Simply apply the resulting fraction to the "festgesetzte Steuer" and SolZ and voilà! you have your share of German taxes on general limitation income.  (If there is passive income in your share - e.g. from rental income - then do a 2nd allocation to extract the taxes due on the "passive" portion of your share of the family income taxes.

 

3.  Proving "anything" to the IRS. 

Don't bother.  No one will read your "proof" and even if they did they won't understand it.  Keep records supporting all the figures that appear on your US tax returns forever (electronic is fine) and sleep well.  The odds that the IRS will ever audit you are vanishingly small.  Other than possibly information generated by your foreign financial institution pursuant to FATCA, the IRS has no knowledge of any foreign income and little, if any, practical means of locating or determining it unless you tell them.  So disclose to them all that you are required by law to disclose. Theoretically they care.  As a practical matter they don't.

 

4.  Will German taxes always be higher? 

Not necessarily.  See my remarks on "passive" income above.

 

5.  How does kindergeld affect your US taxes? 

If because of your income you receive the German tax benefits for children in the form of reduced "tarifliche" taxes that fact is already "baked in" to the "festgesetzte Steuer".  If, on the other hand, you receive Kindergeld in cash, then reduce your share of the festgesetzte Steuer by the amount of Kindergeld received using the same allocation percentage you used to determine your share of family taxes.  Have no fear:  your "regular" German taxes will still be higher than your US taxes on the same income.

 

Congratulations! You're off to a good start.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Hi! Huge thanks for taking the time to write that (and sorry for the slow response.) 

 

There's great advice in there. I will read it more carefully over the next days. 

 

My wife and I previously filed MFJ when we lived in the states. And then I did several years with the 2555 income exclusion as married filing separately her in Europe. Do you happen to know if this means I already revoked my right to file MFJ forever? That would be unfortunate.

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19 hours ago, here_in_deutschland said:

My wife and I previously filed MFJ when we lived in the states. And then I did several years with the 2555 income exclusion as married filing separately her in Europe. Do you happen to know if this means I already revoked my right to file MFJ forever? That would be unfortunate.

 

You mentioned that your wife has a US social security (tax) number.  I surmise she received this incident to working in the US.  Assuming she was tax resident in the US at that time but not a "lawful permanent resident" i.e. a "green card" holder, she would have been a US resident under the "substantial presence" test.  When she left the US and ceased to have a substantial presence or (presumably) a green card, she reverted to her non-resident alien status.

 

The election under § 6013(g) applies only when one taxpayer is a citizen or resident and the other is not.

 

You did not need to elect under § 6013(g) when both of you were residents. You had the same right to file jointly as all married US resident taxpayers have.  Thus, when she ceased to be a resident, your decision to file MFS did not involve any revocation of an election under § 6013(g).

 

Consequently, your right to elect under § 6013(g) remains viable.

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