FREQUENTLY ASKED QUESTIONS
Our team is available as a resource for all of your tax preparation challenges and concerns. We have compiled a list of frequently asked questions, but if you can’t find the answer you are looking for, feel free to get in touch and we will be happy to address your specific situation.
WHY DO I HAVE TO FILE? I DON'T LIVE IN THE US.
The United States employs a worldwide citizen-based tax system for maximum tax coverage. This applies even if you have never entered the US but (for example) rather became a citizen through your parents.
Fun fact: only Eritrea uses a similar worldwide tax system.
HOW DO I BOOK YOUR SERVICES?
Every tax situation is different, and we want to make sure we address each aspect of your unique experience. Your first step with booking our services is to schedule an initial online consultation via Zoom. Depending on our discussion during that consultation, we will be able to advise you on which of our tax preparation packages is best suited for your situation (or you may decide the consultation was all you needed!). If you do decide to book our tax preparation package, 50% of the consultation cost will go toward your tax preparation fees.
WHEN DO I HAVE TO FILE?
The standard filing deadline for US taxpayers is April 15 each year. But as an expat you are automatically granted a two-month extension to June 15. Of course, if your situation requires it, you can file an extension (Form 4868) to report your taxes later in the year.
Note: any taxes due on April 15 under normal circumstances may result in added interest (and penalties in case of an extension request) on balances originally then due.
WHO SHOULD BOOK YOUR SERVICES?
We provide tax advice and annual filing services to American expatriates living in Germany. This tax advice and all annual filing services are limited to our American clients' US tax reporting / filing obligations.
WHAT IS FBAR REPORTING?
Taxpayers with foreign financial accounts (e.g. bank accounts) with an aggregate value of $10,000 at any time during the year are required to file a Report of Foreign Bank and Financial Accounts (FinCEN Form 114) as part of their annual reporting.
Note that the threshold is based on any time during the year rather than at year-end only.
WHAT IS THE FOREIGN EARNED INCOME EXCLUSION?
The Foreign Earned Income Exclusion (FEIE) allows qualifying US expatriates to exclude a certain amount of their foreign earned income from their US taxable income; the size is updated annually. To claim the FEIE, you must meet either the Physical Presence Test or the Bona Fide Residence Test.
Note: you can still claim the FEIE if you are in the US for part of the year, as long as you meet either the Physical Presence Test or the Bona Fide Residence Test. However, the exclusion amount may be prorated based on the number of days you were physically present in the foreign country during the tax year. We can assist you in creating an overview of time spent in the US and any related tax liability.
WHAT IS THE PHYSICAL PRESENCE TEST, AND HOW DOES IT RELATE TO THE FEIE?
The Physical Presence Test is one of two tests used to determine if you qualify for the Foreign Earned Income Exclusion (FEIE). To meet the Physical Presence Test, you must be physically present in a foreign country (or countries) for at least 330 full days during a consecutive 12-month period. The 330 days do not need to be consecutive, and you can choose the 12-month period that provides the maximum exclusion. If you meet the Physical Presence Test, you may be eligible to exclude a portion of your foreign earned income from your US taxable income.
WHAT IS THE BONA FIDE RESIDENCE TEST, AND HOW DOES IT RELATE TO THE FEIE?
The Bona Fide Residence Test is the other test used to determine if you qualify for the Foreign Earned Income Exclusion (FEIE). To meet the Bona Fide Residence Test, you must be a bona fide (actual) resident of a foreign country (or countries) for an uninterrupted period that includes an entire tax year (January 1 to December 31 for most taxpayers). Bona fide residence is generally established by demonstrating that you have set up a permanent home in a foreign country and intend to live there for an extended period. Various factors, such as your purpose for being in the foreign country, the nature and length of your stay, and your employment situation, are considered when determining bona fide residence. If you meet the Bona Fide Residence Test, you may be eligible to exclude a portion of your foreign earned income from your US taxable income.
WHAT IS THE FOREIGN TAX CREDIT?
The Foreign Tax Credit (FTC) is a non-refundable credit that allows US expatriates to offset taxes paid to a foreign government against their US tax liability. The FTC helps to prevent double taxation on the same income. You can claim the credit using Form 1116. The FTC and FEIE can be claimed on the same tax return; however, any taxes on income excluded by the FEIE cannot be used in determining the FTC.
WHAT IS THE FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA) AND FORM 8938?
The Foreign Account Tax Compliance Act (FATCA) is a US law that aims to combat tax evasion by US taxpayers with offshore assets. Under FATCA, certain US taxpayers holding specified foreign financial assets with an aggregate value exceeding certain thresholds must report these assets using Form 8938, which is filed along with the annual tax return. Form 8938 is separate from the FBAR and has different reporting thresholds.
CAN I CLAIM DEDUCTIONS AND CREDITS AS AN EXPAT?
Yes, US expatriates can claim most of the same deductions and credits available to US taxpayers living in the United States. Some common deductions and credits include the Home Mortgage Interest Deduction, Child Tax Credit, the Earned Income Tax Credit, and the Lifetime Learning Credit. Keep in mind that certain limitations or exclusions may apply depending on your specific situation.
WHAT IF I HAVEN'T FILED MY US TAXES FOR SEVERAL YEARS?
If you haven't filed your US taxes for several years, we can help you assess the steps necessary to return to compliance. Depending how many years are involved, you may be eligible for the Streamlined Filing Compliance Procedures, which allow eligible taxpayers to catch up on their tax filing and reporting obligations without facing penalties. This program requires filing the last three years of tax returns and the last six years of FBARs, if applicable.
WHAT IF I HAVE DUAL CITIZENSHIP?
US citizens with dual citizenship are still subject to the same US tax and reporting requirements as those with only US citizenship. Dual citizenship does not exempt you from filing a US tax return or reporting foreign financial accounts. You must report your worldwide income and comply with all relevant US tax laws, regardless of your other citizenship.
Relatedly, US citizens working for a foreign government may still find their income is subject to US taxation. The rules for taxing this income can be complex, and you may qualify for certain exclusions or deductions.
WHAT IF I HAVE A FOREIGN RENTAL PROPERTY?
If you have a foreign rental property, you are required to report the rental income and expenses on your US tax return, even if the property is located outside the United States. Additionally, the foreign rental property may need to be reported on the FBAR and/or Form 8938, depending on the value of the property and your other foreign financial assets. Note: you will most likely be able to offset foreign taxes paid against any US tax obligation on net rental income via the FTC.
WHAT IF I AM SELF-EMPLOYED WHILE LIVING ABROAD?
If you are self-employed while living abroad, you are still subject to US self-employment tax, which consists of Social Security and Medicare taxes. However, you may be eligible for the Foreign Earned Income Exclusion (FEIE) to exclude a portion of your foreign earned income from your US taxable income. Self-employed individuals must also pay close attention to their foreign tax obligations, as they may be subject to additional taxes and reporting requirements in their country of residence. Note: most countries tax all worldwide income you generate while a resident, so you will need to report this on your local tax return - even if mostly generated from online clients based outside of Germany.
HOW DO I ACCOUNT FOR FOREIGN EXCHANGE DIFFERENCES?
Currency fluctuations can impact your US tax return when you convert your foreign income and expenses into US dollars. For tax purposes, you must report your foreign income and expenses in US dollars using the appropriate exchange rate. The Internal Revenue Service (IRS) requires that you use the yearly average exchange rate for reporting your foreign earned income, unless you can establish that the use of the average rate would be inaccurate. We can assist you with the conversion of your international activities (e.g. Euro-denominated) into USD using that rate for the current tax year reporting.
HOW LONG SHOULD I RETAIN MY TAX RECORDS?
Many sources quote a general seven year retention recommendation. In reality, as with many things, it depends on your exact situation. Basic employment documents should be retained for three years; property sale documents should be retained almost forever. And, of course, if you have substantially underreported or inaccurately reported your income, the timing may be longer.
We recommend setting up an online document storage option, which you can then organize by tax year. There's then no need to "make space" in a cluttered storage area, and you can be safe by retaining your documents semi-permanently.
I JUST MARRIED A NON-US CITIZEN; HOW DOES THIS IMPACT MY TAXES?
As an expat, you've come to understand that the US has requirements for worldwide reporting of income; those requirements will also apply to your spouse - if you select Married - Filing Jointly as your tax class. This allows you to take advantage of larger standard deductions, but it also adds the same requirement for worldwide income reporting to your spouse.
Another alternative is to select Married - Filing Separately. Under this tax class you will register your spouse as a "Nonresident Alien," and their income will not be subject to reporting to the IRS. One note: if your spouse has any income, US assets, or other ties to the US (and / or if you claim your spouse as a dependent), the first year of this selection you will need to apply for an Individual Tax Identification Number (ITIN) for your spouse - AND this will require that first year's return to be filed by paper.
WHAT IS A PFIC, AND HOW DO I KNOW WHETHER I HAVE ONE?
The term PFIC stands for Passive Foreign Income Corporation. More specifically defined, a PFIC is any entity owned fully or in part by an American taxpayer (individual or business) that earns its income through generally "passive" (i.e. not active business) means and has either or both of the following criteria:
Passive assets (e.g. investment assets) equal to 50% or more of total assets (cash is considered in this formula, if other investment assets are present)
Passive income sources equal to 75% or more of total gross income. For this purpose, passive income is generally defined as derived from investments or generated in any way other than via active business operations.
Some common examples of PFICs include: non-US based mutual funds, international investment companies, and employer pension funds with significant employee contributions.
The reporting for PFICs is very complex and requires review by a specialist in this area. We are happy to consult with you regarding PFIC considerations; however, at this time we are not able to provide filing or reporting services covering this area.
CAN YOU ALSO PREPARE MY GERMAN TAXES?
Our certification is US-based under the Certified Public Accountant (CPA) registration. The equivalent for filing taxes in Germany is a Steuerberater and is not part of our service offerings currently. The services of a German tax advisor can be costly, though, - typically calculated with a base rate + percentage success rate, depending on the size of the refund received. For most American taxpayers, filing in Germany can be easily handled via the use of WunderTax (check out germantaxes.de).
DO I NEED TO FILE A GIFT TAX RETURN FOR GIFTS MADE TO FOREIGN INDIVIDUALS?
US citizens and residents are generally required to file a gift tax return (Form 709) if they give gifts exceeding the annual exclusion amount to any individual during the calendar year, regardless of the recipient's citizenship or location. However, gifts made to a non-US citizen spouse have a higher annual exclusion limit. We can consult with you to determine how much of any gifts made must be reported.