For US Citizens & Green Card Holders. The United States is one of the only industrialized countries that taxes its citizens and green card holders who live abroad on their worldwide income. With only a few de minimis exceptions, all US citizens residing abroad who have income must file annual US individual income tax returns to report that income. Green Card holders and spouses of US citizens who have elected to be taxed as US citizens must also declare their worldwide income and file returns.
The good news is that once you have established your tax home in a foreign country, you may be able to exclude a portion of your foreign earned income (in 2020 up to $ 107,600), exclude or deduct a portion of your foreign housing expenses, and also may be able to take a foreign tax credit for taxes paid to a foreign government. This does not relieve you of the need to file a US tax return (filing requirements are based on gross income and filing status), but it may substantially reduce the amount of taxes that you owe to the US Government.
There are special problems that arise with respect to self-employed individuals and individuals with high earned income or substantial income from investments that may result in their needing to pay taxes to both Germany and the United States. The income tax treaty between Germany and the United States is used to minimize double taxation.
(Note: We also speak German. If needed, we can discuss your tax situation in detail with your German tax adviser in his or her native language.)
For Nonresident Aliens If you are married to an American citizen or resident, you may want to obtain a US tax identification number in order to increase your spouse's exemptions. In some cases it might even make sense to elect to be taxed as a US resident. If you elected in prior years to be taxed as a US resident, you must file a notice with the IRS if you no longer wish to be taxed on your worldwide income. This is a one-time election.
For all nonresident aliens, if the correct amount of taxes was not withheld on US source income, you are required to file a US income tax return. Many Germans, for instance, own rental property in the United States. This income needs to be reported on a 1040NR income tax return and possibly in the state where the income was earned. There are certain elections that you can make to eliminate withholding taxes on the rental income and reduce the effective tax rate on that income.
Nonresident aliens need to keep track of the time they spend in the United States each year. If certain travel thresholds are exceeded, the IRS may attempt to tax nonresident aliens on their worldwide income based on a presumption that they have become US residents. The tax treaty between Germany and the United States provides some relief from the effects of this rule, but you should seek advice on your individual situation.
2. REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS ("FBAR") FinCen Form 114
Each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds USD 10,000 at any time during the calendar year, must report that relationship by April 15 (with possible Extension to October 15) of the following calendar year by electronically filing the FBAR report with the Department of the Treasury's BSA Website. The form and instructions can be downloaded at http://bsaefiling.fincen.treas.gov/main.html. A civil penalty for non-willful failure to file the FBAR report can be up to $ 10,000 per undisclosed account, and a penalty for willful failure can be the greater of $ 100,000 per account or 50 percent of the total balance of the foreign accounts. See the instructions for more details on who needs to file and what accounts are covered.
3. EXPATRIATION TAX COMPLIANCE
The rules for taxation of expatriating US citizens and long-term permanent residents under Internal Revenue Code Section 877 changed dramatically in 2004 and again in 2008. The new rules increased the threshhold for application of Section 877 but removed some of the exceptions to coverage. In 2008, an exit tax also was imposed under new Code Section 877A. Expatriation (giving up one's citizenship or permanent resident status) is a serious matter and should be undertaken only after obtaining advice from counsel as to the immigration and tax law effects.