The United States of America is one of a few countries in the world that taxes its private citizens and corporations on their worldwide income. That means that it is required for all U.S. citizens and businesses to file a tax return every year, no matter where they are a resident, even if the income is earned overseas, and regardless in what currency the income was earned.
Furthermore, it is important to note that many tax benefits allowed to U.S. residents are not available to citizens overseas. For example:
- donations to charities not registered in the U.S. are not tax deductible,
- property cannot be transferred tax-free to spouses who are not U.S. citizens,
- Medicare benefits cannot be received.
All American citizens have to file U.S. taxes each year if their worldwide income exceeds certain thresholds. This also applies to Americans living abroad, for example American expatriates in Germany.
Unfortunately, the tax treaty between the U.S. and Germany does not prevent Americans living in Germany from filing U.S. taxes. Our experienced U.S. tax attorneys offer comprehensive advice regarding U.S. taxes for expats in Germany.
The Foreign Earned Income Exclusion (FEIE) for Americans living abroad is perhaps the most interesting and challenging part of the U.S. tax code and has been constantly changing since 2001. While there have been debates about how much foreign-earned income should be excludable and to whom the provisions should apply, lawmakers in congress have been very clear that the U.S. tax system is based on citizenship rather than residency.
If you live overseas and meet certain requirements, you can exclude your earned income on your U.S. tax returns. Alternatively, you can get a tax credit for the foreign taxes paid to the host country in which you live and work. However, you cannot do both on the same income. Many times, it is the most simplest to exclude your income on IRS Form 2555 and then get a prorated tax credit for any income above the excluded amounts. The tax credit, whether taken in full or prorated is reported on IRS Form 1116.
Currently, the exclusion amount is USD 97,600 for 2013, USD 99,200 for 2014 and USD 100,800 for 2015. You may also qualify to take the additional housing exclusion which we can consult you on. For Americans living abroad that fall below the maximum exclusion amount, their U.S. tax return may be relatively straight forward.
All three of the following requirements must be met before you are eligible to claim the exclusion on IRS Form 2555.
- Your tax home must be in a foreign country (in Germany, for example).
- You must have foreign earned income, whether it is a foreign based or U.S. based company.
- One of the following points has to be fulfilled:
- You are a U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
- You are a U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty and who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.
- You are a US citizen or a US resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
If you are part owner of a foreign corporation, LLC, or partnership:
If you are a U.S. citizen and you own 10 percent or more of a foreign corporation (a corporation organized outside of the USA) you are obligated to file Form 5471 each year with your tax return. On this form, you must report the ownership of the corporation and other data. It also includes a balance sheet for the corporation and income and expense sheet for the current year for the corporation.
Owning real estate in a foreign country:
If you own real estate abroad the U.S., income tax rules regarding that property are almost the same as if the property were located in the U.S. On your U.S. tax return, you would still depreciate the property and follow the same rules with respect to income and expenses as you would on a property located in the USA. Owning a property overseas by itself, does not require you to file any special forms. However, some additional new forms may be required depending on your operation of the property and any foreign legal entities which may be used to hold ownership of the property.
U.S. Social Security coverage extends to self-employed U.S. citizens and residents whether their work is performed in the United States or another country. As a result, when they work outside the United States, citizens and residents are almost always dually covered since the host country will normally cover them also.
Most U.S. agreements eliminate dual coverage of self-employment by assigning coverage to the worker's country of residence. Although the agreements with Germany, Belgium, France, Italy and Japan do not use the residence rule as the primary determinant of self-employment coverage, each of them includes a provision to ensure that workers are covered and taxed in only one country.
U.S. taxpayers who have foreign bank accounts, foreign stock accounts, and other financial accounts must disclose this information on their regular tax return. In addition, if the total value of these financial accounts exceeded USD 10,000 at any time during the tax year, the Bank Secrecy Act requires you to report the account yearly to the Department of Treasury. This is done by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114 Report of Foreign Bank and Financial Accounts (FBAR).
What makes this even more relevant is that the U.S. Treasury Department has made groundbreaking agreements with Germany, France, Italy, Spain, and the UK to create an intergovernmental exchange of information on bank accounts held across borders. The U.S. Treasury has also reached agreements with both Switzerland and Japan to cooperate on a framework for sharing financial information on bank accounts.
Failure to file any of these forms can result in substantial penalties as well as further government inquiry into a taxpayer's financial affairs.
We are happy to consult you on your particular details especially as they relate to different types of income, the income exclusion versus the tax credit, what constitutes a tax home and how to best optimize your current situation.
We also advise you on reporting requirements and make sure you stay in compliance so that you can continue your life and business with a minimum amount of stress.
Your U.S. attorney located in Germany is happy to assist. Please do not hesitate to contact us by e-mail (firstname.lastname@example.org) or by phone (+49 69 76 75 77 80) and we will be happy to make an appointment with you in order to discuss your questions about U.S. expat taxes in Germany.
We look forward to working with you.
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