US College Grad in DE: Advice

[stephendisraeli]

@kiia

Aren't we considered residents indefinitely by the gov?

If your physical residence is in the EU, then the respective EU country will consider you a resident. In which case brokerage providers anywhere in the world are required to comply with the EU laws on retail investment products. And if the EU country has a way to enforce this law, the possible 5M€ fine should provide motivation for brokerage providers to at least give the impression of due diligence and KYC.

You may find some brokerage providers that ignore EU laws, but as soon as the EU finds a way to enforce fines on them, this source of US investment products may dry up.

Why should I even use a 401k if my income isn't getting taxed by the USA to begin with?

If you use the foreign tax credit (instead of the foreign earned income exclusion) to reduce your US taxes due, then this income is considered to be taxed by the US and can be used to contribute to US pension plans. Probably not 401ks as far as I understand (I'm the one without US citizenship in my family and blundered directly into the PFIC trap when investing money belonging to my kids) as these require cooperation with the employer, but IRAs.

Finding a provider in the US that allows contributions to such plans by nonresidents is another matter, though.

At present it looks like if I was MFJ

Caution. MFJ will drag a non-US-citizen spouse into the US tax system. They will be considered a full US tax resident and unable to use large parts of the tax treaty. It will expose their investments and retirement plans to adverse and possibly punitive treatment by the US. Do not do this without due consideration.

Why do you say single stocks? Why not ETFs?

ETFs that are not domiciled in the US (i.e. their ISIN does not beginn with US) are considered shares of "passive foreign investment companies", or PFICs, in the US tax return.

The consequences of this treatment are just terrible. The form to satisfy the reporting requirement is byzantine and time-consuming (US tax preparers will charge about $200 per copy, and one copy is needed for each ETF annually), and the taxation methods are extremely adverse (including the possibility for effective tax rates in excess of 100%, and unmitigated double taxation).

 

[genemz]

@stephendisraeli Another option would be to invest through your German partner.

 

[stephendisraeli]

@genemz Correct, but this option requires a large amount of trust and the consideration of cases like the partner passing away prematurely. In the latter case, inheritance tax may become an issue - this depends on the volume of the investment and whether the couple was married or unmarried.

 

[tlwilnos]

@stephendisraeli Do not contribute to a bAV unless your employer is contributing a significant amount (e.g. you pay 1€ and they match that 1€). Ideally your employer will contribute to one even if you don't.

The legal minimum of 15% employer contribution is not worth it as most of the plans have high fees and vesting periods so it's only worth it if your employer contributes more.

 

[willemdafoe62]

@kiia Be conservative with your budgeting prior to tossing into your investments ( but absolutely do it). That company car is provided, however 1% of its value will be deducted from your pay every month as company provided vehicles are considered as a taxable perk/income.

Also don't get caught up in the tax class decision stuff if you and the wife go 4/4 it is easy. If you go 3/5 all that means is that it is equalized when you file every year. In the end the amount it the same (though the difference could be invested in the short term and grown until you file and pay the equlization).

I did this as an American working in manageable. A local contract with a German wife on who was also working. Yeah the salaries are much lower and after taxes and insurances the take home is bleh, bit it is managable.

 

[kiia]

@willemdafoe62 Can you expand on your middle paragraph? I don’t follow. For what it’s worth we are not married and won’t be for a little while.

I am absolutely a conservatively minded person. Paid my way through five years of American uni without any loans or financial support. Near term financial plans are to build up significant expat-appropriate emergency liquidity in USD I-bonds/HYSAs, and then Euros as well. After that just piss all my money into ETFs.

 

[willemdafoe62]

@kiia So depending on your situation you will be in one of 6 tax classes. This is before income considerations apply the progressive rate.
If you are single/divorced then class 1, which means you have the highest tax burden.
2 is like 1 but you get certain deductions for children or alimonies.
3 is married but only 1 works or there is a large income disparity- here you will have a smaller initial tax burden and the spouse with less pay (who would be class 5) has a higher % burden. At the end of the year you do your normal declaration and depending on how it comes up you may owe the difference vs class 4.
4- two wage earners both taxed with similar burden (this is generally the simplest for married couples)
5- the other spouse in the 3/5 relationship who earned less, but has a higher base tax burden.
6- if you have income from multiple employers

It may be easier to look it up honestly, I am waiting for this flight to board so keeping it "brief".

If you are single you will both be 1's though.

 

[tlwilnos]

@kiia Use foreign tax credits on your US return and not the FEIE as that will allow you to contribute to an IRA. Generally speaking, your German income tax will always be higher than your US tax obligation on the same amount of income. This will also allow you to later file as head of household (e.g., you get married and have kids) and you can claim the refundable portion of the child tax credit).

Use an IRA to invest as that will not cause you any tax issues in Germany or the US. IRAs are covered by the double taxation treaty (see article 18A) and you will only have to declare any eventual distributions when you are retired (capital gains and dividends in an IRA won't be taxed). Ideally you will have opened a traditional IRA before establishing residency in Germany as that will allow you to deduct your contributions from your German taxes. Otherwise, just stick to a Roth.

If you want to invest beyond the $6,500 IRA limit, you either have to buy single stocks via a German brokerage or open a taxable US brokerage account using a US residential address to invest in mutual funds/ETFs. Doing the latter makes your German tax return more complicated because you will be taxed on the unrealized gains of the mutual funds you've invested in. My understanding is that this is not too complicated/expensive though and may be a good point to involve a German Steuerberater to help you.

Some consider using a relative's address as "lying." As far as I know, it is not illegal, but more an issue with the brokerage firms who want to comply with KYC rules and are doing more than required. The worst case would be the brokerage closing your account/not allowing any further contributions. I believe lots of American emigrants are OK with not informing their brokerage about living abroad and it's kind of like a "don't ask, don't tell situation," but you will have to make that call for yourself.

If your company offers a bAV, only contribute if they offer significant matching (much more than the minimum 15%). Ideally, they will contribute to one even if you don't, but I would say they are only worth it if they match your contributions euro for euro (at least).

If you have an account that is not in Euros and is not a checking account and it earns interest, close it before the end of 2023 as they are changing how currency speculation is determined.

If you have currency "gains" (e.g., profit from converting dollars to euros or vice versa) of any kind, then that becomes reportable (and therefore taxable) starting at 600€.