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American Expats and the IRS in Germany

Updated - November 2018

U.S. citizens living in Germany have to file an annual return, even if no taxes are owed

The most essential thing for an American residing in Germany (or any other foreign country) to know is that he or she is required by law to file a U.S. tax return every year with the Internal Revenue Service if income is above the filing requirement. It doesn't matter if all income was earned in Germany, or if a German return was filed and German taxes paid. He or she still must file a U.S. Form 1040 (or variation of it) and normally other forms as well.

The US Embassy in Germany has a website page with information on the IRS at this link. This same website page has links to the IRS for downloadable forms and publications as well as contact numbers in the States for assistance for international customers. Additionally, there is information and links on FBAR, fatca as well as the IRS exchange rate used for filing and information on mailing tax forms.

Unless individuals are highly paid, they may not have a U.S. tax liability. Most individuals are able to qualify for the foreign earned income exclusion, which allows them to reduce their taxable income by up to $102,100 for 2017 ($104,100 in 2018) relating to compensation earned outside of the U.S. The exchange rate for the year 2017 used by the IRS to calculate income was $1.00 = €0.923.

In order to claim the exclusion, an individual must fulfil the requirements of either the Substantial Presence Test (330 foreign presence days within a 12-month period) or the Bona Fide Residence Test (resident of a foreign country for a full calendar year). Once the requirements are fulfilled, the exclusion can be claimed by completing and attaching a Form 2555 to the Form 1040.

For those highly paid individuals who cannot fully exclude their foreign compensation from U.S. taxation with the foreign earned income exclusion, a foreign tax credit can be claimed by completing and attaching a Form 1116 to the Form 1040. The foreign tax credit provides a credit for German taxes paid on income earned outside of the U.S. that is subject to U.S. taxation. By claiming either or both the foreign earned income exclusion and/or the foreign tax credit, most individuals eliminate any double taxation assessed between the U.S. and Germany.

Other items of income, such as interest, dividends and capital gains, are subject to different sourcing rules depending on the circumstances. For example, interest earned on a U.S. bank account by an American residing in Germany will be taxable in Germany under the U.S./German tax treaty. The income must also be reported on the U.S. return, and a foreign tax credit can then be claimed against the U.S. tax assessed on the income.

Information regarding the taxation of other types of income and the related income tax treaties can be obtained from the IRS website at www.irs.gov/Individuals/International-Taxpayers. Americans residing overseas on April 15th receive an automatic two-month extension to June 15th for filing their U.S. tax return. When filing the return, the individual should attach a statement indicating that he or she qualified for the extension under Reg. 1.6081-5(A). The extension is only an extension of time for filing, not an extension to the payment of any tax liability. Therefore, if a tax liability is due, interest will be assessed from April 15th.

Since the implementation of the Affordable Care Act (commonly referred to as Obamacare) the IRS may require attaching a form 8965 to the annual tax return. According to the IRS: "The Affordable Care Act includes the individual shared responsibility provision and the premium tax credit that may affect your tax return. The individual shared responsibility provision requires you, your spouse, and your dependents to have qualifying health insurance for the entire year, report a health coverage exemption, or make a payment when you file."

For US citizens living abroad it may be necessary to file this form to be eligible for the "health coverage exemption". More information on that is available here. A pdf file of the form is here. Instructions in a pdf for filling out the form is here.

It sometimes happens that Americans residing outside of the U.S. are unaware of the requirement that they must file a return. The IRS is fairly tolerant in such cases. If these individuals come forward voluntarily, file returns for delinquent tax years and pay the tax owed (if any) along with related interest and penalties, there will be no criminal charges imposed. It is probably best to consult a tax professional with international taxpayer experience to prepare the late filings and correspond with the IRS.

In contrast, if the IRS discovers that a taxpayer is delinquent in filing his or her U.S. tax returns, the individual could be facing fines, property seizure, attachment of wages or even prison. Contrary to common belief, the IRS has developed sophisticated means of catching delinquents in this computer age. For example, every time an American renews a passport, the State Department obtains his or her Social Security number and reports it to the Internal Revenue Service.

You may also obtain a copy of IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, which should answer most of your questions. It is available at most Embassy and Consulate offices or can be downloaded from the IRS site. The IRS has updated their website for U.S. taxpayers living overseas. This website contains the basic tax information plus links to other detailed topics: http://www.irs.gov/Filing

Due to the complexity of both the U.S. and German tax systems and their interaction with one another, it is always recommended that you hire a tax consultant (Steuerberater/CPA) or a professional US Tax preparer to guide you through the intricacies involved in filing returns as well as to provide some ease of mind during your stay abroad

All U.S. taxpayers residing outside the United States should mail their tax returns to:
Internal Revenue Service Center
Austin, TX 73301-0215

You can if you wish also file your tax return electronically at www.irs.gov.

You may have to file more than just a tax return!

In recent years the IRS has added some reporting requirements to the sometimes already complicated process of completing and sending in a tax return.

According to the IRS, in order to try to prevent offshore tax evasion, many Americans are now required to submit not one, but two, additional forms each year.

Report of Foreign Bank and Financial Accounts (FBAR)

The FBAR requirement has been around for a while. Prior to 2013 this form was submitted to the Treasury Department directly. However, that form is now part of the IRS regimen. It is designated as Financial Crimes Enforcement Network (FinCEN) Form 114 and must be filed electronically each year.

From the IRS website:
“The FBAR is a calendar year report and must be filed on or before June 30 of the year following the calendar year being reported. Effective July 1, 2013, the FBAR must be filed electronically through FinCEN’s BSA E-Filing System. The FBAR is not filed with a federal tax return. A filing extension, granted by the IRS to file an income tax return, does not extend the time to file an FBAR. There is no provision to request an extension of time to file an FBAR.

United States persons are required to file an FBAR if: The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.”

Statement of Specified Foreign Financial Assets (Form 8938)

A few years ago the Congress passed a law known as the Foreign Account Tax Compliance Act (FATCA). This legislation is specifically aimed at trying to catch individuals who are evading taxes by using what the IRS refers to as Foreign Financial Institutions (FFIs). As a result of this law, many banking and other financial institutions outside the United States have been asked by the IRS to provide detailed account information about Americans with accounts with their particular institution. There has been widespread concern regarding the reporting requirements and demands made by the IRS. Consequently, the law has been changed, modified and extended in order to arrive at some sort of reasonable compliance regimen. While the IRS sorts out the reporting details with the FFIs, it has added another filing requirement for individual tax filers. Form 8938 is submitted with the annual tax return.

From the IRS website:
“Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with an income tax return. The new Form 8938 filing requirement is in addition to the FBAR filing requirement. A chart providing a comparison of Form 8938 and FBAR requirements may be accessed on the IRS Foreign Account Tax Compliance Act web page.

The IRS has a specific definition for a “taxpayer living abroad”. From their website:

“You are a taxpayer living abroad if:

You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or:

You are a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.”

Form 8938 filing thresholds are as follows (from the IRS website):

“If you are a taxpayer living abroad you must file if:
You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or:

You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.”

The following links provide more detailed information about each filing requirement. It would be wise to check them out to see exactly what you might need to do.

FBAR
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR

Form 8938
http://www.irs.gov/instructions/i8938/index.html

Comparison of requirements for the FBAR and Form 8938:
http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements

More information on fatca:
http://www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Reporting-for-U.S.-Taxpayers

Important Information for Overseas Military Members

Delaying paperwork could mean forfeiting or postponing important tax credits

January 2017

Members of the military have a lot to navigate when it comes to filing their taxes. Service members are entitled to some unique tax breaks under the tax code, which can make their tax returns more complicated than the average filer. And when they're on a tour of duty outside of the United States or in a combat zone, they are automatically granted extensions to file their returns.

But this year, military members could jeopardize important tax credits if they delay obtaining a Social Security number (SSN) or individual taxpayer identification number (ITIN). Taxpayers and their dependents need to have a tax identification number, either a SSN or ITIN by the filing deadline (including extensions) to claim certain tax credits. Previously, taxpayers could file late or amended returns to claim credits once getting a valid taxpayer identification number after the tax filing deadline.

The Protecting Americans from Tax Hikes (PATH) Act implemented new rules about eligibility for the child tax credit (CTC), American opportunity credit (AOC) and the earned income tax credit (EITC). Taxpayers and qualifying children now must have a valid taxpayer identification number by the due date of the return (including extensions) in order to claim the CTC or AOC. And taxpayers and qualifying children must all have SSNs eligible for work by the due date of the return (including extensions) to claim the EITC.

There is no exception for military service members serving in the U.S. For those serving outside of the U.S. who are eligible for an automatic extension to June 15, the SSN/ITIN requirement must generally be met by the automatic extension due date (or by the additional extension date if applicable).

Taxpayers who must obtain an SSN for a newborn will benefit by starting the process as soon as possible to make sure they have it by the applicable due date (including extensions) to claim the EITC when they file. The parents of U.S. children born abroad should allow for extra time necessary to get an SSN from abroad for their newborn child. Taxpayers may want to request an additional extension if needed to allow more time to get an SSN.

For more information, taxpayers can learn more from The Tax Institute's Timing is everything: The date taxpayers get an SSN or ITIN now affects whether they're eligible for refundable tax credits

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