Paying taxes to US on US pension, now Germany also wants $$$

9 posts in this topic

I'm a US citizen retired to Germany since 2012. I receive a pension from my former employer in the USA and have been paying federal income tax every year I've lived here. Every year I've filed both the US (IRS) and German resident tax returns.  I have not paid any tax to Germany on my pension, only the USA.  My pension was fully funded by my company, I did not make contributions.  

 

Earlier this year the FinanzAmt informed me that as of 2018, I have to pay income tax on my pension to Germany.  I was given a bill for back taxes that must be paid by April 16.  When I inquired at the FinanzAmt I was told that I never should be paying income tax to the USA.

 

Is the FinanzAmt correct?  If so, how do I stop my pension plan from taking federal taxes for the US?  The pension plan staff in America do not know how this would be done.  Nor could anyone advise if I can get a refund or credit for past tax paid to the US.

 

I am especially concerned as 1) the FinanzAmt is asking for a sizable chunk of money by April 16; 2) The IRS phone helpline in the US is indefinitely unavailable due to the coronavirus endemic; 3) I would have to withdraw funds for payment from my 401k (which is suffering -40% due to the market downturn) and hope that my withdrawal check doesn't take 3 weeks to travel through the international postal system.

 

Any advice/help/guidance on these points will be greatly appreciated!

0

Share this post


Link to post
Share on other sites

You should be asking a Steuerberater these questions.  I recommend contacting any of the firms recommended on TT. 

2

Share this post


Link to post
Share on other sites
1 hour ago, ThreeinNJ said:

 I was given a bill for back taxes that must be paid by April 16.  When I inquired at the FinanzAmt I was told that I never should be paying income tax to the USA.

 

Is the FinanzAmt correct?  If so, how do I stop my pension plan from taking federal taxes for the US?  The pension plan staff in America do not know how this would be done.  Nor could anyone advise if I can get a refund or credit for past tax paid to the US.

 

You may be unable to avoid dual-taxation.  Here's some light reading on the subject:

 

https://scheller-international.com/blog-beitraege/german-income-taxation-of-us-pensions-and-similar-retirement-provisions.html

If that seems confusing, it's because the whole thing is confusing.  I have read the Income Tax Treaty between the US and Germany.  I have studied both contract law and finance, and I honestly can't make much sense of the Tax Treaty, other than to say again:  You may be unable to avoid dual-taxation.

1

Share this post


Link to post
Share on other sites
14 hours ago, JG52 said:

You should be asking a Steuerberater these questions.  I recommend contacting any of the firms recommended on TT. 

 

We had an appointment set with a Steuerberater prior to the widespread pandemic shutdown, set for early March.  But they called back to postpone the meeting indefinitely.  I was hoping the FinanzAmt would extend their deadline for the tax payment, as the IRS has done (tax filing in the US extended 3 months to July 15).  So far the FinanzAmt is firm about getting their payment by April 16, no exceptions.

0

Share this post


Link to post
Share on other sites
12 hours ago, Space Cowboy said:

 

You may be unable to avoid dual-taxation.  Here's some light reading on the subject:

 

https://scheller-international.com/blog-beitraege/german-income-taxation-of-us-pensions-and-similar-retirement-provisions.html

If that seems confusing, it's because the whole thing is confusing.  I have read the Income Tax Treaty between the US and Germany.  I have studied both contract law and finance, and I honestly can't make much sense of the Tax Treaty, other than to say again:  You may be unable to avoid dual-taxation.

 

Many thanks for this, hopefully a Steuerberater will be able to make sense of our problem.  We have all the paperwork on our 2018 and 2019 taxes, the personal meeting would have facilitated our progress of course, but if I have to scan and email the documents that's what I'll have to do.

0

Share this post


Link to post
Share on other sites

I retired from the Department of the Army last year and will be filing U.S. and German tax returns for 2019.  I wouldn't think of wading through the German tax law or the nuances of the U.S.-German tax treaty on my own.  I also use a U.S. tax professional in the States for my U.S. federal return.  These are situations where throwing money at the problems make the problems go away...legally and safely.  My tax professional in the U.S. is an Enrolled Agent with the IRS, so I sleep soundly knowing she is my direct interface with the IRS for any questions about my U.S. federal return.

 

I contacted Thomas Zitzelsberger earlier this year for assistance with my 2019 German taxes.  There was no need for a face-to-face meeting, which was good since we are in different parts of the country.  After the initial free phone consultation, I had a better understanding of what would be required to allow Thomas's firm to prepare my tax return.  Soon after that, I went to the UK for three weeks, but while I was there, I had another phone conversation with Heike Reil, who will be preparing my German return.  We spoke for about 30 minutes, and she answered all of my questions, and provided additional information for questions I didn't realize I should have asked.

 

I remember Heike telling me about a 2018 change in the tax law for retirement annuities, but didn't pay much attention to it since the impact to me would be negligible, if even noticeable.This is obviously not her first rodeo.

 

Heike sent me the link and password for their secure portal that I use to upload all of tax documents.  Most of the documents were already in electronic format, but for those that weren't, I used my multi-function printer to scan them to PDFs and upload them.

 

The world situation now is likely not the best for time-sensitive requirements, but I would be surprised if any of the tax firms are shut down.  I wish you the best!!!

 

 

 

 

 

 

1

Share this post


Link to post
Share on other sites
17 hours ago, ThreeinNJ said:

Earlier this year the FinanzAmt informed me that as of 2018, I have to pay income tax on my pension to Germany.  I was given a bill for back taxes that must be paid by April 16.  When I inquired at the FinanzAmt I was told that I never should be paying income tax to the USA.

 

Is the FinanzAmt correct?  If so, how do I stop my pension plan from taking federal taxes for the US?  The pension plan staff in America do not know how this would be done.  Nor could anyone advise if I can get a refund or credit for past tax paid to the US.

 

 

The information you report receiving from the FA is both accurate and inaccurate.

Assuming the payor of your US pension was not a US or State government or instrumentality thereof, the FA correctly informed you that your US pension is subject to German income taxation.

 

The FA is incorrect in stating that said pension is not taxable by the US.  (In a larger tax policy sense it is true that your pension should not be taxable by the US but, alas, that is not the case. It is fully taxable by the US.)

 

To avoid the effects of this double taxation, you "simply" compute and claim a foreign tax credit (FTC) for German income taxes paid on your US pension. 

 

You will claim the credit by filing US Form 1116 on your current and amended returns (if necessary). 

 

Your pension income based on past employment falls into the "general limitation" category for FTC purposes. However, since you likely earned your US pension by working in the US, the default "source" of that pension is US.  Normally, this would mean that you could not claim a FTC attributable to that income because it is not "foreign source".

 

Here is where the tax treaty comes to your rescue.

 

Article 23 (Avoidance of double taxation) para. 5 (c) (applicable to US citizens resident in Germany) allows otherwise US source income that is taxable exclusively (or partially) in Germany were it derived by a German citizen to be "resourced foreign" for purposes of computing the US foreign tax credit.

 

Form 1116 has a "basket" (category) of income items that are "resourced foreign".

 

Compute the portion of your modified German taxes allocable to this "resourced foreign" category and claim a credit for it on your US return.

 

If you would obtain any benefit from doing so, you can also file US amended returns (Form 1040X) to claim the credit on past years returns and claim a refund of US taxes if applicable.  Unlike the ordinary 3-year statute of limitations on refund claims there is a 10-year SOL for refund claims based on the foreign tax credit.

 

The general rule for US citizens resident in Germany is that each item of your income will be taxed at the highest rate allowed by either country's tax system for that particular category of income.

 

In short, tax-wise, US citizens abroad are in the worst of all possible worlds.

 

 

 

 

3

Share this post


Link to post
Share on other sites
On 3/28/2020, 9:19:17, JG52 said:

The world situation now is likely not the best for time-sensitive requirements, but I would be surprised if any of the tax firms are shut down.  I wish you the best!!!

 

Many thanks for your help - and a big Thank You for your service!

 

 

 

 

 

0

Share this post


Link to post
Share on other sites
On 3/28/2020, 10:49:01, Straightpoop said:

 

The information you report receiving from the FA is both accurate and inaccurate.

Assuming the payor of your US pension was not a US or State government or instrumentality thereof, the FA correctly informed you that your US pension is subject to German income taxation.

 

The FA is incorrect in stating that said pension is not taxable by the US.  (In a larger tax policy sense it is true that your pension should not be taxable by the US but, alas, that is not the case. It is fully taxable by the US.)

 

To avoid the effects of this double taxation, you "simply" compute and claim a foreign tax credit (FTC) for German income taxes paid on your US pension. 

 

You will claim the credit by filing US Form 1116 on your current and amended returns (if necessary). 

 

 

Form 1116 has a "basket" (category) of income items that are "resourced foreign".

 

Compute the portion of your modified German taxes allocable to this "resourced foreign" category and claim a credit for it on your US return.

 

 

In short, tax-wise, US citizens abroad are in the worst of all possible worlds.

 

 

Quote

Thank you very much, I had suspected that US Form 1116 would be the proper selection but the verbiage was so confusing (to me, at least).  When we meet with a Steuerberater we're going to let them handle all the paperwork.  The good news is that the Steuerberater has advised us today that they will extend the deadline for payment of back taxes, at least for several weeks.  So we have more time to shore up our savings and prepare for these unanticipated expenses.

 

 

0

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now