AI Legalese Decoder: A Promising Solution to Navigate Capital Gains Double Taxation for American Expats in Germany
- October 23, 2023
- Posted by: legaleseblogger
- Category: Related News
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Seeking advice on handling a tax issue in Germany as an American expatriate
Introduction:
I am currently residing in Germany as a student and have been here since March 2020. While I have no earned income from work at the moment, I do have capital gains and dividends income from selling stocks in the US through a small trust. These funds are crucial in supporting myself during my studies. However, I am facing a significant tax problem with the German tax authorities, despite having been diligent in paying taxes in the US.
Current Situation:
My Steuerberater, or tax consultant, has been engaged in negotiations with the German tax authorities for over a year regarding my tax obligations for the years 2020 and 2021. Sadly, I have not yet successfully completed the tax payment process in Germany. Recently, I received a notice stating that I have a substantial tax bill due to the authorities’ failure to acknowledge a considerable portion of the taxes I paid in the US. It is crucial to note that I have consistently fulfilled my tax responsibilities in the US.
Confusion and Possible Solutions:
Now, I find myself in a dilemma. I’m uncertain if my Steuerberater is effectively performing their duties or if I genuinely need to pay the full amount of capital gains taxes to Germany, despite already paying in the US. While it is clear that going forward, I should prioritize paying taxes in Germany first and subsequently seek relief from the tax burden on my US taxes, my current concern revolves around the situation pertaining to my taxes for the years 2020, 2021, and 2022. Should I consider finding a new Steuerberater who can better advocate for the recognition and acceptance of the taxes I have already paid to the US? Is this even a feasible option? Alternatively, should I proceed with paying the full amount to Germany and then endeavor to negotiate a reduction in taxes with the US for future years?
AI Legalese Decoder Assistance:
In addressing this complex situation, leveraging AI Legalese Decoder could be immensely helpful. This technology is designed to decode legal language and provide a comprehensive understanding of regulations and tax laws. By employing AI Legalese Decoder, I can gain valuable insights into the tax requirements and obligations specific to my situation, potentially aiding me in making informed decisions.
Conclusion:
My current tax predicament has left me feeling deeply stressed and uncertain about the best course of action. I am sincerely grateful for any insights, advice, or recommendations that can shed light on how to navigate this issue effectively.
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****** just grabbed a
I am afraid that you are headed the wrong way in making sense of this. In fact, you are doing the exact opposite of what you should be doing.
All over the world, countries are taxing its residents and not their citizens. The only exception is the USA, which expects its citizens to file US taxes regardless of where they live. For example, a German citizen who lives in the US would not need to file taxes in Germany, because they don’t live there. I am sure you already know this.
You are an American who is a resident of Germany. Germany expects you to pay your taxes in Germany, because that’s where you live. This is what all other countries in the world do. You cannot be exempt of German taxes for the years where you lived in Germany. You use health care, roads, public transportation, etc. So you benefit from all the things which is partially funded by German taxes. The US will not pay your share to Germany, and as a resident with income, you can’t have these things for free, either.
The country which needs to recognize that you paid taxes elsewhere is not Germany but the US. As a US citizen, you are actually exempt from US taxes if you live abroad up to a specific amount, approx. 100k USD per year.
Find a tax advisor in the US who could advise you on how to get back some of your money from the IRS because your problem is not with the German tax office. And you can’t expect a German tax advisor to know this, unless they are specialized in helping immigrants from the US.
Because of the US-Germany tax treaty, most Americans living in Germany are exempt from double taxation.
So get a new tax adviser that is specialized in Americans living in Germany. They can then advice you if you should ask a return from the IRS and pay the taxes in Germany or be exempt for paying the taxes in Germany.
Assuming you had less than 100k revenue, you need to get the money back from the IRS to pay german taxes, if you were a tax resident of Germany during those years.
You may be able to waive german penalties for late payment since you can prove your good faith with taxes paid on time, mistakingly to the US, but it’s not a right, it’s at the german tax board discretion.
Also, depending on your context, you may be able to negotiate a payment in several installments, if paying full now would put you in trouble, as you can prove your good faith. That would give you more time to get money back from the IRS.
I’m not sure why your tax advisor didn’t told you that. Maybe we miss some details of your context.
> I have capital gains & dividends income from the sale of stocks
The tax treaty details what is supposed to happen in this case, in the last section of Article 23 “Relief from double taxation”, beginning with “5. Where a United States citizen is a resident of the Federal
Republic of Germany:”. It is one of the few provisions of the treaty that is not voided for US citizens by the saving clause.
https://www.bgbl.de/xaver/bgbl/start.xav?startbk=Bundesanzeiger_BGBl&bk=Bundesanzeiger_BGBl&start=//*%5B@attr_id=%27bgbl208s0611.pdf%27%5D#__bgbl__%2F%2F*%5B%40attr_id%3D%27bgbl208s0611.pdf%27%5D__1617741763686
Unfortunately, the tax treaty is not worded in a way that is accessible to taxpayers. *Very roughly*, what is supposed to happen in case of US-sourced (i.e. dividends from US companies) income for US citizens residing in Germany is the following:
1. One figures out the US tax rate due on this income. If it is 15% (the rate for withholding tax if the recipient of the income was not a US citizen) or less, this is the amount to be paid to the US. This amount is then credited against any German tax due, just like the withholding tax (“Quellensteuer”) would be.
2. One figures out the amount of German taxes due, uses the credit generated in step 1 against this amount, and pays the rest.
3. If the US tax rate on the income was higher than 15% (or the respective rate of witholding tax), things get weird. Since this is US-sourced income, paying taxes to Germany on it would *ordinarily* not generate foreign tax credits (they are only generated by paying foreign tax on foreign-sourced income). This would lead to double taxation. So the tax treaty prescribes a process for *re-sourcing* some of this US-sourced income to Germany. Not all of it, but just enough that the tax paid to Germany generates enough FTC to cancel the US taxes due (this is to avoid generating excess FTC that would carry over to the next years). If there is any amount of US tax due after this (which may happen if the US tax rate exceeds the German one), the leftover amount must be paid to the US.
The German-US tax treaty does not contain examples of the necessary calculations, but the UK-US treaty does, for a very similar process.
Not sure what the process is for gains realized on sale. It depends on where they are sourced. If they are US-sourced, the process above should apply. If they are sourced to Germany, tax is paid to Germany and used as credit against US tax due, without any re-sourcing shenanigans.
> Is this even possible?
You basically need to find someone familiar with international taxation and the US-Germany tax treaty. Unfortunately, such people are specialists and their fee schedule is geared toward corporations and affluent individuals. Expect heavy sticker shock, even for short phone consultations.
Not a tax expert, but I believe /u/BeautifulTale6351 is correct. Just to add: From what IÔÇÖve heard (IÔÇÖm not an American myself), Americans can choose between the Foreign Earned Income Exclusion (FEIE) and a Foreign Tax Credit (FTC).
FEIE means you only pay US taxes on income over $100k or so.
FTC means you get a credit in the US for the tax you paid in another country.
For low-tax countries, FEIE is usually the way to go, while for high-tax countries like Germany, the FTC would be better (guess it could depend on your income as well). I believe you canÔÇÖt choose from year to year – once you choose one of them, the decision is final for the next 5 years or so.
So youÔÇÖll probably want to claim the FTC for 2020-2022. If you google those terms, you should find a lot of information. Maybe also check /r/tax or /r/expats or Facebook groups for Americans in Germany. Good luck!
Keep your stocks in the US and use foreign tax credit always – cuz Europe has high taxes. Not sure about Germany but Ireland doesnÔÇÖt have claim on my us investments if I donÔÇÖt bring it into Ireland