Foreign Tax Credit Question - US Citizen and German Resident

[tatenda]

I'm slogging through IRS publication 514 trying to understand the Foreign Tax Credit. I have a question that I'll try to put in basic terms:

Since I am a German resident and my German income tax is always higher than my US tax obligations, will the Foreign Tax Credit (FTC) generally ALWAYS reflect a dollar for dollar reduction to $0 owed in US tax obligations due to taking the FTC?

I'm trying to determine this for sure because I'd like to start investing--I know dividends, etc. complicate the picture, and I know what to stay away from (e.g., PFICs), but I'm trying to keep my need for clarification here as simplified as possible.

Example with made up numbers:

My German salary is $90,000. I pay $30,000 in German income tax. US income tax obligation is $20,000. For FTC purposes, my understanding is this is general income.

I purchase and sell stocks (long term capital gains) through a foreign brokerage account for a $20,000 capital gains profit. I pay $5,000 in German capital gains tax. US capital gains tax obligation is $3,000. For FTC purposes, my understanding is this is passive income.

Would I owe 0$ in US taxes on the German income and capital gains in this situation when applying the FTC? Would it be a 1 for 1 dollar reduction, with $10,000 carryover for general income and $2,000 carryover for passive income? My research tells me no due to the calculations involved, but I'm simplifying it to this 'wrong' understanding to see if someone can help me understand.

Thanks in advance.

 

[rhunette]

@tatenda Your thinking is accurate. It gets messier when you have US source income and you need to allocate deductions between different baskets and categories of income to figure your allocable foreign net income. But in your example - your FTC would wipeout all US tax.

 

[baptist1611]

@tatenda Not 100% sure on your question... but if you use a US based trading account that income wouldn't automatically be on your German income taxes. It can generate tax requirements. In my case I don't bring that money into Ireland, thus Ireland never taxes it, so yes I pay US taxes on that portion though it's low.

It doesn't seem like Germany has a similar concept of remittance basis that Ireland does so this isn't tax advice for Germany so much as a fact that the tax rates and exclusions between the two countries can be different.

 

[catholic777]

@baptist1611

In my case I don't bring that money into Ireland

You know its not a choice, right? Ireland and Germany (like many countries) tax their residents on their worldwide income. So lets be clear, when you say "I don't bring that money into Ireland", (whether you realize it or not) what you are actually saying is that you are committing tax evasion in Ireland.

Also, OP made it clear he was planning to use a foreign brokerage.

/@tatenda your reading is basically correct. You will submit a separate Form 1116 for your general category income FTCs and passive category income FTCs. You will then track your carryover balance for each category separately each year. Also don't forget that because of your income level, you will likely also need a separate 'AMT' version of each Form 1116, so you will likely be submitting 4 in total (and tracking 4 FTC carryover balances).

As you have already alluded to, just be careful about what investments you make to avoid any punitive taxes.

Also, check the US-German tax treaty to see if there is anything applicable there. There likely won't be though unless you have 'US Sourced' interest income or capital gains (with the latter basically being impossible as a German resident).

 

[tatenda]

@catholic777 Thank you for the information!

 

[baptist1611]

@catholic777 Well just to be clear it isn't true the way you represent Ireland's tax laws about world wide income. There is a distinction between tax domicile. That can impact whether what I describe is tax evasion or not. See this link for some details

This may not be true of Germany though as it doesn't seem like the same situation applies.

 

[catholic777]

@baptist1611

If you are resident and domiciled in Ireland for tax purposes, you are chargeable to tax in Ireland on your worldwide income. Worldwide income is the total income that you earn anywhere in the world in a tax year.

 

[baptist1611]

@catholic777 Right.. Now define domiciled... LOL you just want to be wrong here.

Edit: In my case I qualify as resident but not domiciled. What isn't perfectly clear is does ordinarily resident change this at year 4? I don't think so.

 

[catholic777]

@baptist1611

Your domicile is the country where you live with the intention of remaining there permanently.

Is you stay in Ireland temporary? Your post history suggests not, in which case you are committing tax evasion.

 

[baptist1611]

@catholic777 When do I have to make that decision? I haven't left yet, though I do maintain all of my US accounts, and have not ties to any family in Ireland. I don't own property here.

 

[catholic777]

@baptist1611 I don’t know. I am not your lawyer. At a certain point though, it stops becoming a explicit decision for you to make. Your circumstances just kind of make it for you.

 

[baptist1611]

@catholic777 Ah you are just my tax critic, got it. SO IMO I'm not doing evasion as I haven't transitioned my life to Ireland.

 

[catholic777]

@baptist1611 Good luck with your tax evasion. That’s always a great way to start out your life in a new country.

 

[stephendisraeli]

@catholic777

There likely won't be though unless you have 'US Sourced' interest income or capital gains (with the latter basically being impossible as a German resident).

The most notable provision is the reduction of the US withholding tax on capital gains (/edit: dividends, not capital gains) for nonresidents from 30% to 15%. But this only applies to persons who are not US tax residents - as they are supposed to file US tax returns, no flat withholding tax is deducted.

As with any other tax treaty, the savings clause make most of the treaty nonexistent for US tax residents with regard to taxation by the US, and for residents of Germany with regard to taxation by Germany.

 

[catholic777]

@stephendisraeli If I wanted to know the exact rates, I would have read it myself.

Also, you’re wrong about the savings clause affecting the provisions related to tax rates on interest income. Stop giving bad info to people.

 

[stephendisraeli]

@catholic777

Also, you’re wrong about the savings clause affecting the provisions related to tax rates on interest income.

Am I?

Interest in covered in Article 11.

The savings clause is in the protocol part, starting on page 38.

https://www.irs.gov/pub/irs-trty/germany.pdf

Are there any parts of article 11 that are not invalidated by the savings clause?

 

[catholic777]

@stephendisraeli

Am I?

Yes, you are. If you don’t believe me, go ask your CPA. They’ll tell you the same thing.

Edit: hint...you should be looking at the German tax rates on US sourced interest income mr tax “expert”

 

[catholic777]

@stephendisraeli Still waiting. Explain to me how you’re not wrong mr tax “expert”

 

[stephendisraeli]

@catholic777

Still waiting.

I am not overly inclined to continue a discussion after snarky insults. Even though you edited the original one.

You haven't even stated what exactly you consider wrong. The original posting you responded to did not mention interest specifically. What exactly do you mean?

 

[catholic777]

@stephendisraeli LOL. I mentioned interest income from the start. Please don't make excuses.

The fact is, I see you constantly running around the tax subs on Reddit "advising" people with info that is often inaccurate. This is a prime example. I have even seen you give this incorrect "saving clause...resourcing provisions" information before. But when someone now corrects your error, you want to start blaming the other person on "editing" or some other nonsense

Sorry, but if you are going to play at amateur tax advisor, then you need to learn the rules better (or at least be more open to feedback when you make a mistake). We have enough people giving shit advice on Reddit as it is.

And yes, this post is edited to correct grammatical errors and to be nicer