This is a post where I have to emphasize: none of this is advice. It's documenting my decisions and experiences, but you should do your own research and/or speak to professionals before taking any actions regarding tax decisions.
On Friday, June 14, I stuck the wad of papers comprising our U.S. 2018 tax return into a large envelope and mailed it off. My wife and I have to do this process every year, and it’s one of the pleasures of an American living abroad.
Since the US taxes people based on citizenship rather than residency, Americans living abroad are required to file every year with the IRS regardless of whether they owe anything or not. More often than not, those Americans owe nothing year after year, and the process feels completely unnecessary. It ends up being a lot of paper work to say, “Hi there, I still live abroad and pay taxes abroad, and therefore, I shouldn’t have to pay anything back in the US.”
In our circumstances, we have to take the following steps to file without problem:
Buy TurboTax
I’ve been using them for years, and the product works. It nevertheless feels silly to have to shell out any money for this every year when I neither pay nor get paid once the filing is done.
Gather the Information
Even though we exclude our income from taxation using the Foreign Earned Income Exclusion (FEIE), we nevertheless have to document it with as much precision as possible. I print out the bank deposits each of us receive and create a spreadsheet listing the pre-tax sum we earn followed by the USDEUR conversion afterwards on that day to get a total USD total.
Since we also take the Foreign Housing Exclusion, I add up those sums as well with the appropriate conversions.
Since we have stock investments, I print out our brokerage forms as well as auto-import the transactions into TurboTax via the broker itself. That’s very handy. But without any earned income, it’s very hard to actually realize enough income from investments to warrant any taxes being paid.
Apply for the Form D/USA 101
The US has a Social Security agreement with Germany saying a lot of things, but most importantly for us, it says that self-employed people who pay into the Rentenversicherung system here don’t have to pay self-employment taxes back in the US.
This is one of those things that might be confusing if you’ve never been self-employed. When you’re self-employed in the US, you have to pay the full amount of Social Security and Medicare taxes, while employees have to only pay half while the employer pays the other half. Only if you reach a certain threshold of income do you have to concern yourself with the actual income tax.
When you exclude income on the tax return, you’re excluding it from income taxes. But you’re not excluding it from self-employment taxes. That’s a different process, and it involves getting documentation from the resident country saying that you’re in their system. That document in Germany is the Vordruck D/USA 101.
We apply for this in January for my wife, and we get the form typically a month and a half later. It’s a simple form saying what her job is and the dates the form covers and that she’s paying into the German system.
But we have to include it, otherwise we’d be expected to pay self-employment taxes on her income. Instead of filling out the Schedule SE, we just add a statement on one of the lines of the 1040.
Automatic Extension
Because we live abroad and are out of the country on the normal filing date, we’re entitled to an automatic two month extension to file. One doesn’t need to apply for this, and instead you have to write a statement requesting it when filing. I write this out in a word processor, and we both sign it.
Pack it Up and Ship it Off
Then we stick all this paperwork in an envelope and send it off to Texas. Because of the paperwork, E-filing is not an option.
And in the end, TurboTax says something like “Wow, you’re neither getting any money back, nor do you have to send any. How strange.” Yes. Welcome to the world of US tax filing for US expats.
Possible Future Headaches
Some things we might have to worry about in the future but haven’t so far:
- Declaring foreign accounts worth more than $10,000. So far none of our German accounts have reached that threshold, so we’ve been spared.
- Declaring foreign assets.
- Using the Foreign Tax Credit. I’ve considered using it to contribute to an IRA (a different post in and of itself), but it so far hasn’t made enough sense. For example, if I decline the Foreign Earned Income Exclusion, I’d use the Foreign Tax Credit to avoid paying US taxes. But you’re locked into that choice for five years, so I’ve always just used the FEIE. This will definitely become a challenge when I’m paying German taxes on dividends and capital gains, however.
- Complicated income or asset sales. For example, if I ever did any serious side work as a freelancer, I’d have to figure out how to file that in the US. It’s never really been clear how to do that. Likewise, if we ever bought and sold a house for a profit, I’m concerned how that’d be handled.
