File US or German taxes first?

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I have been filing my US taxes first and then German since I get a lot more time for the German filing. I was using the foreign earned income exclusion but I think I will switch to the foreign tax credit since the excess carries over. In this case I think it makes sense that I file German taxes first since I have to pay tax on my US dividend/capital gain income here and this will increase my FTC carryover. Does this make sense? Or is there a better approach?

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4 hours ago, AlexCLE said:

Does this make sense?

 

Not unless you are eligible to claim the refundable child tax credit.

 

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To qualify for the refundable credit you must - in addition to having qualified minor human units AKA "children" - you must have "qualified earnings".

 

If you exclude your foreign earnings under the FEI exclusion (IRC § 911, Form 2555), those earnings are disqualified and you get no refundable credit. Thus, by not excluding and instead claiming the FTC on that income you effectively eliminate US taxes on that income and preserve your qualification for the refundable child tax credit.

 

This benefit might, however, be cancelled out if you have substantial amounts of passive investment income in the form of US corporate dividends.

 

For more info go to www.irs.gov and download Form 8812 and its instructions.

 

 

 

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But if I have to pay tax in Germany on my US dividends, wouldn't this negate any tax owed in the US because the German tax rate is higher and I apply the FTC? Oder?

 

I'll have a look at form 8812.

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By treaty, the US gets the first 15% of US source dividends.  You will receive no credit against German taxes for anything in excess of that amount - assuming you can prove you actually paid anything to the US.

 

 

You also need to download Pub. 54, Pub 514 and Form 1116 with the instructions.

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Let's see if I follow. For example, I pay $10.000 in income tax in Germany, from Germany-sourced income. In the US the income tax would have been only $7.000 due to lower tax rates. So using the FTC I would zero out my US income tax and would still have $3.000 to offset taxes on US dividends and capital gains, correct? And if I owe more than $3.000 in taxes on dividends and capital gains I would need other tax credits to reduce this? Like the child tax credit?

 

On the other hand, the FEIE reduces my income to 0 (I am under the exclusion limit) and then my US taxes are the net of dividend/cap. gains tax - child tax credit - standard deduction?

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26 minutes ago, AlexCLE said:

So using the FTC I would zero out my US income tax and would still have $3.000 to offset taxes on US dividends and capital gains, correct?

 

Incorrect. 

 

No FTC for German taxes paid on US source income.

 

German taxes paid on general limitation income are not creditable for German source passive income.

 

Read Pub. 514 and instructions to Form 1116.

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Ok, let's see if I learned something or just confused myself further. So in my example with 10k foreign taxes, I should calculate what my taxes would have been in the US on my foreign income and this is the amount I can credit? So if I would have owed only 7k in the US then all of my taxes on foreign income are erased. But then I would still owe taxes on my US-sourced capital gains/dividends/interest, right? But for these I can apply the standard deduction and child tax credits?

 

edit: I also pay tax in Germany on my US capital gains/dividends/interest. This can be also credited on the 1116 as passive income tax right?

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1 hour ago, AlexCLE said:

I also pay tax in Germany on my US capital gains/dividends/interest. This can be also credited on the 1116 as passive income tax right?

 

German taxes on capital gains if you pay at least a 10% tax and all interest (resourced under the treaty) are creditable.  Taxes on US source qualified dividends are not creditable unless you are a high-roller and have to pay 20% rather than 15% US max tax in which case a portion of your US dividends can be resourced foreign so as to make up the 5% difference between the treaty max and the actual US rate.

 

Read Pub 514 and the instructions to Form 1116.

 

 

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