American in Germany - challenges with both German and US taxes?

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I am American living in Munich for entire 2019. I am attempting to use online software SteuerGo since it has English version. My main source of income is a salary in Germany, and this is straight forward process to enter. My challenge is with some misc. USA investment income like dividends, interest and partial cash liquidation distribution (reported on 1099-DIV, line 9). Cash liquidation distribution is rare even for USA standards. In essence, YAHOO was acquired by Verizon and what was left over was investment stock. Someone in that new company, decided that the best would be just to liquidate this new stock and I was left with surprised cash/tax liability. Based what I learned about German tax system, I need to enter all details, even cash liquidation distribution under Anlage KAP. As result, I will need to pay approx. 25% tax for these investments in Germany. This was easy part.

 

I read that I should first complete German and then USA taxes. I am almost complete with my Germany taxes. Issue comes how to report German taxes on my USA tax return and I have two questions:

 

1) I am completing German 2019 tax but I will be actually paying for it in 2020. Could I report German 2019 tax that I am paying on investment in 2020, on USA 2019 forms?

2) For each dividends, interest and partial cash liquidation distribution, I have 1099-DIV or 1099-INT. My second problem is how to calculate German taxes for these investments for USA tax return. I know that I need to use 1116 form but I am not clear how to calculate and document it for IRS. I would appriciate an example calculation, for example dividend was 1000 EUR and German tax is x. This amount x can be used on the 1116 form and to appropriately document it you should...

 

Last, I also have question about tax service preparation software. Is it possible to claim tax service preparation software cost on German taxes? 

 

Regards,

James

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Hey James,

 

I have been doing both German and US taxes since 2010. I always do my German first, and then the American. You have to keep things separate, so that any money earned in Germany gets taxed here, and vice versa.

 

As a US citizen, you will need to fill out a 2555 form, in order to exclude your foreign earned income. This will likely be most of your earnings. Then, you just enter the rest as usual on your 1040, along with the necessary appendices. I never end up paying American taxes, since I can exclude all of my foreign earned income. Even if I had income in the states, the standard deduction would likely cover that.

 

By the way, I called the IRS numerous times in the beginning to make sure I was doing things appropriately. They were willing to help. The german Behörden are forbidden to give tax help.

 

Tom

 

 

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Thanks for your input @dmbartender. Good suggestion about IRS. I will follow up with them.

 

You did give me good tip but my questions are still open. I am sure you had similar situation in the past. You probably had either interest or dividend from US, and usually, there are no taxes charged up front in US. Based on US-German tax treaty, US expats pay tax on dividends or interest in Germany.

 

Lets imagine you had $1000 in interest in 2018 from US bank for which you received 1099-INT. There is $0 listed for paid taxes on 1099-INT. This income must be reported on German 2018 submission. If I understand correctly German tax system, there would be approx. 25% tax on interest. Let's say that is $250. This would be paid in 2019 as part of 2018 German tax submission. My question is, would you report $250 on US 2018 submission since it is related to the 2018 interest? In essence, does it matter when tax is paid or is it key income year?

 

Regards,

James

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Hi James,

 

I have no experience with dividends, but I think as a US citizen, that the dividends would be taxed in the US, not in Germany. Maybe someone else will chime in with more advice. Otherwise, call the IRS. It sounds strange, but they actually answer, and help.

 

Cheers,

 

Tom

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It seems IRS does not provide phone support due to corona-19 virus. Any assistance would be appreciated to my questions above.

 

Regards,

James

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On 5/1/2020, 11:59:28, jamesDe said:

I read that I should first complete German and then USA taxes.

 

That is the best and most practical sequence whenever the foreign tax credit comes into play.

 

On 5/1/2020, 11:59:28, jamesDe said:

1) I am completing German 2019 tax but I will be actually paying for it in 2020. Could I report German 2019 tax that I am paying on investment in 2020, on USA 2019 forms?

 

Timing issues can be headache when computing the US foreign tax credit.

 

You will note on IRS Form 1116 (Foreign tax credit for individuals) a little box that asks you whether your qualifying foreign tax were "paid" or "accrued".

 

It is almost always better to check the "accrued" box since cash payments of German taxes - especially taxes on investment income that was not subject to German tax withholding under the Abgeltungsteuer - will typically take place at least one calendar year after the year in which the German tax liability arose.  By opting for the "accrual" method you can claim the US foreign tax credit as soon as you are certain you have figured out what your German tax liability will be - whether you have paid it or not.

 

Things can get really hairy, however, if the German rules regarding the timing of a taxable event differ from those of the US.  For example, let's assume Germany regards your liquidation sale of your interest in Altaba as a 2019 event but for some obscure reason - perhaps because of some contingency or other - the US regards the liquidation as taking place in 2020, when you receive your last installment of the liquidation distribution.

 

In that case you pay the Germans in 2019 and record the German taxes on a 2019 US Form 1116.  Since in the eyes of the IRS the transaction did not become a taxable event until 2020, your heavy German taxes in 2019 will be far more than you can use in 2019.  Those potentially creditable German taxes are not lost, however.  The excess from 2019 is simply carried over to 2020 and entered on your 2020 US Form 1116 where it will (or should) neatly offset your US taxes on that "2020" transaction.

 

 

 

 

On 5/1/2020, 11:59:28, jamesDe said:

2) For each dividends, interest and partial cash liquidation distribution, I have 1099-DIV or 1099-INT. My second problem is how to calculate German taxes for these investments for USA tax return. I know that I need to use 1116 form but I am not clear how to calculate and document it for IRS. I would appriciate an example calculation, for example dividend was 1000 EUR and German tax is x. This amount x can be used on the 1116 form and to appropriately document it you should...

 

First off:  you don't have to "document" anything for the IRS. Other than the numbers in the forms and/or statements they may require you to file, your documentation remains with you against the day the IRS actually audits your return.  (The IRS has maybe 5 people who understand the foreign tax credit and I doubt any of them work in Audit.  I am absolutely certain none of them work on taxpayer assistance lines. Your chances of being audited because of the foreign tax credit are vanishingly slight.  But let your conscience be your guide.

 

Let's start with the transaction that is the most significant:  the liquidation distribution(s) you received for your shares of Altaba.

 

Although the distribution was reported to you (and the IRS) on a 1099-DIV a liquidation distribution is NOT a dividend for US tax purposes.  It is taxed as a "return of capital" and, provided you held your shares as the capital asset of an individual investor, you will be taxed on the difference between the value of the distribution you received and your adjusted tax basis in your Altaba shares.  Essentially:  a sale of your shares for either more (gain) or less (loss) than your adjusted cost basis.

 

(I am not competent to state with any degree of authority how this transaction is regarded under German tax law but I would guess that it would also be taxed as if it was a sale.  If you acquired your Yahoo! shares prior to 1.1.2009 then the entire transaction may be regarded under German tax law as a non-event but the 2017 spinoff of Yahoo! operating business to Verizon may have an impact on that assumption.)

 

So what was your adjusted cost basis in Altaba?

 

Did you buy Altaba after it was spun out of Yahoo! in 2017 or did you acquire it by default as a result of hanging on to your Yahoo! shares acquired before the Verizon transaction?

 

If the latter, what were you told by Yahoo! and/or Verizon and/or Altaba about what percentage of the value of your Yahoo! shares immediately before the transaction was allocable to the Yahoo! operating divisions that were sold to Verizon?

 

I am not familiar with the details of that deal and, surprisingly, could find nothing on the internet so do tell:  did Yahoo! shareholders get any amount of cash in addition to their shares of Altaba?  Did you get some shares of Verizon? Neither?  Both?

 

Maybe the reason I cannot find any tax basis allocation information on the internet is because Verizon's cash compensation (ca. $4.8 Billion) was paid directly to Altaba rather than Yahoo! shareholders.  In that case there would be no need to adjust your basis and your basis in Altaba would be essentially the same as what you paid originally for shares in Yahoo!

 

Anyhow here's the formula you requested.  It assumes the Germans regard the 2019 liquidation distribution as the proceeds of a sale and not a dividend. It also assumes that you acquired your Altaba shares either directly after 2017 or indirectly through acquisition of Yahoo! shares after 31.12.2008 (and ignores the €801 exemption amount for investment income):

 

USD proceeds (liquidation distribution value) converted to EUR at USD/EUR exchange rate on date proceeds received

 

minus:

 

EUR cost basis of Altaba shares (which equals:

USD cost of Yahoo! shares:

converted to EUR by USD/EUR exchange rate on date Yahoo! shares acquired =  EUR cost basis

Less:  EUR value of any USD cost adjustments resulting from 2017 spinoff to Verizon)

 

equals:

 

taxable Veräußerungsgewinn   x 26.375% (25% Abgeltungsteuer + 5.5% Solidaritätszuschlag) =  German taxes creditable on US tax return

 

(Since the transaction is subject to at least a 10% foreign tax the capital gain is deemed to be "foreign sourced" for purposes of claiming the foreign tax credit provided that you, the seller, were resident in Germany when the transaction took place.)

 

 

NB:  My understanding is that some liquidation proceeds were paid and received by Altaba shareholders in 2019 and the remainder will be paid some time in 2020.  What, if any, effect this will have on the German side of things I cannot say but for US tax purposes the transaction should be taxable in its entirety in 2019 regardless of when you receive the final payment of proceeds.

 

NB:  one additional fly in the US foreign tax credit ointment:  since the transaction will likely be treated as long term the max. US tax will likely not exceed 15% (unless your holding period was less than 1 year).  Depending upon the amount of your other income you may be required to adjust your foreign capital gains included on line 1 of the Form 1116 by a "rate differential".  See the instructions to Form 1116 and IRS Publication 514.

 

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I really appriciate for detailed input @Straightpoop.

 

Unfortunately, I purchased Yahoo in 2011 and I am obligated to pay taxes. ALTBABA shareholders receive one time cash payment in 2019, $51.50 per shared owned. The rest should be paid in 2020 or 2021 but amount is unknown. If there is negative balance, shareholders will need to pay ALTBABA money back. I am fine not to worry about future but focus on my 2019 tax obligation.

 

I took your formular and converted it in my numbers. Here is what I came up with:

 

$5150 USD proceeds (liquidation distribution value) converted to $5150 x 0.893 = 4598,95 EUR 

 

minus:

 

EUR cost basis of Altaba shares (which equals:

$1240 USD cost of Yahoo! shares:

$1240 USD x 0,893 converted to 1107,32 EUR by USD/EUR exchange rate on date Yahoo! shares acquired =  EUR cost basis - I will need to figure out what was exchange rate back in Aug 2011. 

Less:  EUR value of any USD cost adjustments resulting from 2017 spinoff to Verizon)

 

equals:

 

3491,63 EUR taxable Veräußerungsgewinn  x 26.375% (25% Abgeltungsteuer + 5.5% Solidaritätszuschlag) =  816,17 German taxes creditable on US tax return

 

If my math is correct, my German tax obligation would be 816,17 EUR. You also mentioned that 801 EUR but if I understood correctly, this might not be applicable in my case.

 

BTW, I have invested proceed for ALTBABA cash liquidation within 9 months to purchase another USA stock. As I was reading how to complete German taxes, I read that there is some kind of 1 year rule if I reinvest this gain but I could not figure out how this would/could affect tax submission. Would you know if there is any such German rule? 

 

Last question is if provided formula "taxable Veräußerungsgewinn  x 26.375% (25% Abgeltungsteuer + 5.5% Solidaritätszuschlag)" could be used for dividends and interest? If yes, I am all set.

 

Truly appriciate for your advice.

James

 

 

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17 hours ago, jamesDe said:

If my math is correct, my German tax obligation would be 816,17 EUR. You also mentioned that 801 EUR but if I understood correctly, this might not be applicable in my case.

 

For historic EUR/USD exchange rate on a specific date, I recommend the following free service:

 

https://www.xe.com/currencytables/

 

OK. Now that you have computed your EUR basis, proceeds and gain from the transaction, the next thing you have to do is add to that figure all the other items of investment income (Kapitalerträge) such as net gains, interest, dividends, etc. that you realized while a German resident in 2019.

 

From that total you can subtract €801 (€1,602 if you file a joint return with a spouse) as a "Sparerfreibetrag".  The taxable balance is subject to a MAXIMUM rate of 26.375%.

 

If, however, your actual "regular" (tarifliche) income tax rate would produce a lower tax, then the lower "regular" tax will apply and you will have to allocate a portion of that lower regular tax to your investment income ("passive" items in US tax parlance) to compute your US FTC on foreign "passive" income.  In addition, regardless of whether you pay the maximum Abgeltungsteuer rate or a lower "regular" rate, you can claim as a US FTC only those German taxes allocable to "foreign source" passive items.  So, if you had some US source dividends included in your German tax base you have to allocate a portion of your German taxes to those items and subtract them from the total of German taxes available for the FTC. (The Germans will give you a GERMAN FTC for up to 15% of the US taxes you actually pay on those US-sourced dividends but in most circumstances that is likely to be zero.)

 

 

 

17 hours ago, jamesDe said:

 

BTW, I have invested proceed for ALTBABA cash liquidation within 9 months to purchase another USA stock. As I was reading how to complete German taxes, I read that there is some kind of 1 year rule if I reinvest this gain but I could not figure out how this would/could affect tax submission. Would you know if there is any such German rule? 

 

I have never heard of such a rule.

 

In the US tax-free exchanges exist for rental real estate (§1031 exchanges) and annuities (§1035 exchanges) because the tax code is written by and primarily for the benefit of the wealthy but for ordinary stock or mutual fund owning peons tax-free exchanges are not available.

 

Another question that I cannot say with certainty is how US and German tax law will treat the distributions you can expect to receive in possibly 2020, and/or 2021 and/or 2022 from Altaba's liquidating trust and - as you mention - the possibility that if prior distributions were too large that a portion may be clawed back at some future date if Altaba's management has grievously erred in its financial estimates.

 

If you want to read the whole story in all its gory detail, you will have to read Altaba's SEC filing - specifically:  Proposal 1 here:

 

https://www.sec.gov/Archives/edgar/data/1011006/000119312519149882/d724897ddef14a.htm#toc724897_6

 

 

IRS guidance (statutory, regulatory and otherwise) on the TIMING of your (presumptive) gain(s) on the sale of this security is less than clear.  Economically, this is an installment sale of a publicly traded security.  But as stated in IRS Pub. 537 (Installment sales), you cannot use the installment sale rules to spread your gain out beyond the year of the effective date of liquidation (here:  2019).  You have to report the entire gain in 2019.  Moreover, if in the unlikely event you are required to refund a portion of your distribution, it may not only reduce a previously computed tentative gain it may ultimately produce a loss.  In such case, the eventual loss can be claimed only in the year of the final distribution and cannot be carried back to 2019 to offset previously reported - and taxed - gains.

 

According to Altaba's SEC filing (above), they estimated the total distribution would be in the range of $76-$79 a share but the recent hi-jinx in the stock markets due to Covid19 may have knocked those estimates and plans into a cocked hat.

 

So, when you receive your next installment from the liquidating trust, do you file an amended 2019 return to report the gain or (assuming you have fully recovered your basis with the 2019 distribution) do you report the additional distribution as additional gain in the year actually received?  Since amended returns are the bane of everyone's existence I would lean toward the "additional gain in the year received" solution but don't take that as gospel.

 

Note also:  not all of your distribution in September 2019 was return of capital. A very small percentage may have been treated as a distribution of net income (i.e. a dividend).  Double check your 1099-DIV to be sure.
 

God (or @PandaMunich  may know the answer to what German tax law would make of all this.  I certainly do not know but would be pleased to learn.

 

Because of the enormous size of this liquidating distribution and how widely held the shares were, there is likely to be continuing Q&As both in the investment and tax expert communities as the year wears on.  If I bump into anything useful, I'll post it and I would ask you to do the same.

 

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On 5/9/2020, 12:48:30, Straightpoop said:

So, when you receive your next installment from the liquidating trust, do you file an amended 2019 return to report the gain or (assuming you have fully recovered your basis with the 2019 distribution) do you report the additional distribution as additional gain in the year actually received?  Since amended returns are the bane of everyone's existence I would lean toward the "additional gain in the year received" solution but don't take that as gospel.

 

 

@jamesDe

 

Further to the above:

 

According to my research, the Internal Revenue Code, specifically: IRC §331 and §346, contain no guidance on how or rather, when, to report gain from a complete liquidation of a stock corporation received in distributions over 2 or more tax periods.

 

The consensus of practitioner and academic opinion, however, is that a shareholder's gain can be spread out - i.e. deferred - over the several tax periods in which the liquidating distributions are received. In contrast, an overall loss on the liquidation cannot be claimed until the year when the last of such distributions is received.

 

Thus, if your 1st liquidating distribution received in 2019 is already greater than your tax basis in Altaba, then you report the difference as gain on your 2019 return.

 

If as is expected you receive additional distributions in 2020 and/or 2021 or later, your tax basis, having been fully recovered in 2019 will be zero and each such distribution (to the extent it is not treated as a dividend distribution) will be a gain reported on Form 8949/Schedule D.  In other words, you don't file an amended return for 2019 reporting a larger gain and the practical result is that you have spread the gain out over more than 1 tax year and thus obtain maximum benefit from your standard deductions.

 

Logically, if your 1st distribution in 2019 fails to exceed your basis you will have no gain to report in 2019 but your basis will be reduced. Unless you are reliably informed by the liquidating trustees that this 1st distribution will also be the last, you do NOT report income or loss in 2019. (NB: This is the same effect any other non-liquidating return of capital distribution would have.) Subsequent distributions will further reduce your basis until they either 1) finally exceed your basis in which case you would then have a reportable gain in that year or, 2) if by the time you receive your final distribution you have still not recovered your basis, then in that final distribution year and only in that year you may report a capital loss.

 

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I really appriciate for all information shared @Straightpoop.

 

I am comfortable to submit my USA taxes but still I am fuzzy how/where to specify cost basis of Altaba shares and proceeds from the Altaba shares liquidation. It is easy if you are have German stock proceeds but for the one abroad, I need to use tax statement type "Other tax statement" and there is no option to enter cost basis and proceeds, at least I was not able to find it yet. I can only enter one value under Form KAP, line 15. Perhaps, I only need to enter gain value (proceeds from the Altaba shares liquidation - cost basis of Altaba shares purchase).

 

Thank you.

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28 minutes ago, jamesDe said:

t is easy if you are have German stock proceeds but for the one abroad, I need to use tax statement type "Other tax statement" and there is no option to enter cost basis and proceeds, at least I was not able to find it yet. I can only enter one value under Form KAP, line 15. Perhaps, I only need to enter gain value (proceeds from the Altaba shares liquidation - cost basis of Altaba shares purchase).

 

Unlike the US form 8949, Anlage KAP does not provide a poopsheet for you to enter basis, proceeds, date of sale, etc.

 

For that you have to buy tax prep software like the one I use:  WISO Steueroffice from Bühl.  It uses a data entry system and automatically totals and posts the results to the right hole on the German tax forms and simultaneously generates an explanatory statement should the FA come a callin'.

 

If you don't want to fork over the ca. €41 to buy the software, you will have to open a spreadsheet and do the computations yourself and plug the results in the right holes.

 

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I searched for English version for the German tax software and found SteuerGo. It has online version and it is mostly self explanatory but not in this area.

 

Does WISO Steueroffice from Bühl come in English language option? I could not find on their website.

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24 minutes ago, jamesDe said:

Does WISO Steueroffice from Bühl come in English language option? I could not find on their website.

 

Not to my knowledge.

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