Declare everything on US and German tax return? Exceptions?

[snowymtn]

Hi All,

I’m a German citizen living and working in the US for many years with a green card. I have some questions regarding taxes if, hypothetically, I would move back to Germany. While giving up the green card could be an option in future to make everything easier, I would not consider this at the moment. So that means I would have to file tax returns in the US (because of green card) and Germany (because of residency).

First question, in general, would I always have to declare everything on both returns? For example, let’s take capital gains in a US brokerage account. I would declare this on the US return as usual. But would I also need to do currency conversion and report the same capital gains on the German return? Or is there income that only needs to be reported on one side?

I assume everything always on both sides, which leads me to the next question about foreign tax credit. How would this work in practice? I would first do my German tax return to see what taxes I paid in which category. Then calculate the credit and apply it to my US return? Is there a formula how to calculate this? E.g. is this taxes before or after deductions? Before or after getting a tax refund/pay taxes?

Is this doable with TurboTax for US and Elster or similar in Germany? Is anybody doing this? :-D

Bonus question: Would I have to file a US state tax return, too? Do the same credits apply?

 

[jacob_]

@snowymtn Generally, yes, you would need to declare all capital gains in both returns and yes, this will be a little bit of work for your German return. If you only hold a few ETFs and don't do much selling, it's pretty straightforward and investing into US-ETFs actually has some tax advantage discussed here and here. In most situations, you will first pay tax to Germany and then get this tax credited towards your US taxes. Also note that you should very much avoid any non-US ETFs as long as you have a greencard due to US foreign taxation / PFIC rules.

You can use TurboTax or just complete the US return yourself. As long as you don't have PFIC investments, it's totally doable (and that's why should be careful to avoid any PFICs!).

Yes, Elster is completely sufficient to file your German taxes. If you have lots of funds in foreign accounts, filling in KAP-INV is a bit painful, but generally it's painless if you know a little bit of Excel.

If you don't live in a US state anymore and don't have closer connections, you will not need to file state returns. You need to check for your state.

 

[snowymtn]

@jacob_ Regarding PFICs: Good call, so in practice that would mean to continue using US broker to invest in US ETFs. Which would mean converting EUR to USD and pay transfer costs etc.

Do I have to be careful with the US broker, too? How do I find out if I currently have such foreign ETFs? Can I look at the exchange where they are traded?

 

[jacob_]

@snowymtn Transferring EUR to USD costs 2 USD with Interactive Brokers without any exchange rate markup. This is very cheap and effective.

Realistically, if you buy ETFs at US exchanges (NYSE, Nasdaq), you should be safe. I also believe that some US brokers actually restrict US residents from trading foreign funds. Generally, you can check the ISIN and if it starts with US you are safe.

 

[stephendisraeli]

@snowymtn

How do I find out if I currently have such foreign ETFs?

You look at the ISIN of those ETFS.

If it starts with US, good, if it starts with a different country designator, it's highly likely to be considered a PFIC by the IRS.

 

[stephendisraeli]

@snowymtn

First question, in general, would I always have to declare everything on both returns?

Yes, both countries tax worldwide income of their tax residents.

But would I also need to do currency conversion and report the same capital gains on the German return?

Yes, and you'll have to do a lot of manual reporting, and figure out how to correctly apply the tax treaty provisions.

I would first do my German tax return to see what taxes I paid in which category.

You may have to file one tax return first, then the other one (using information from the first return), and then amend the first return after getting the numbers for the second.

Is there a formula how to calculate this?

Not a formula, but a method. It's in the tax treaty. The technical explantion of the treaty might even contain examples.

Do the same credits apply?

State tax returns are not covered by the tax treaties. I assume this is where things get messy if you are, for some reason, required to file a state tax return.

And watch out for punitive taxation provisions, most infamously PFICs. The US tax code does horrendous things to US tax residents (this includes green card holders and citizens regardless of where they live) who own PFIC shares (this might sound like an exotic financial construct, but it isn't. If you want to be safe, consider any non-US-domiciled fund to be a PFIC. This includes ETFs, mutual funds, etc.).

 

[snowymtn]

@stephendisraeli

State tax returns are not covered by the tax treaties. I assume this is where things get messy if you are, for some reason, required to file a state tax return.

Wow, noted, would have to make extra sure to "sever ties" as @aaharpervas suggested.