Could Americans in Germany soon get relief from filing double taxes?
The US is one of two countries in the world that requires its citizens abroad to file income taxes, even if they owe nothing. A new legislative push could change this for all Americans abroad.
When John Doyle moved to Cologne from New Jersey, his dream was to work as a foreign correspondent. Now, nearly two decades later, he makes his living from comedy — auf Deutsch, even. Doyle says he spends €3,500 every year on accountants and tax advisors in the U.S. and Germany to stay compliant.
Doyle’s one of the nearly 120,000 Americans living in Germany and 9 million living outside of the U.S. Every year, Americans abroad are reminded of the double tax workload they face. No matter where a U.S. citizen lives in the world, they are required to file an income tax statement with the Internal Revenue Service by Monday, June 17th.
The U.S. is the only industrialized country that exercises citizenship-based taxation. Even in countries with a reciprocal income tax agreement with the U.S., such as Germany, U.S. citizens must file annual tax returns even if they don’t owe any additional taxes. And if they own a business or property abroad, things quickly get more complicated.
Both Republicans and Democrats abroad have been pushing for the Internal Revenue Service to switch to a residency-based taxation model that ease the burden on Americans working overseas, and one member of Congress is leading the charge.
The burden of double taxation
Many U.S. citizens who live in Germany don’t end up owing any U.S. income tax because of foreign tax credits or the foreign earned income exclusion, but the investment restrictions, compliance effort and cost of filing are a real burden.
“What I hear the most is that there are too few accountants with the knowledge and experience to prepare U.S. tax returns for expats,” says Kerry Reddington, chairman of Republicans Overseas Germany in Frankfurt. “Even when you find one, they have more work than they can handle, so there is a very long wait.”
And it’s going to be expensive. Emma Wood runs a textile company from Berlin and has dual citizenship in the U.S. and U.K., where she owns an apartment.
So she has to file income taxes in three countries every year. “The amount of money I spend on accountants is highly disproportionate to what I’m earning,” she says. She pays about $2,000 (€1800) for accountants to file her U.S. and German taxes, and does her U.K. filing herself, because she was told that would be another £1,000.
A recent survey by Democrats Abroad found that 55 percent of respondents engaged a tax professional because of the complexity of filing their income taxes, and 61 percent of those people paid more than $500 (€450) — twice the average cost of tax preparation for a resident. And that’s regardless of whether you actually owe Uncle Sam any additional payments.
One year, Doyle owed the IRS a whopping $3.70. “It said I needed to send a check payable to the U.S. Treasury. A bank transfer would have been €50, and you can’t send money in the mail,” he said. “I called my brother in Alabama to ask if he could send them a check in my name, because I don’t have a US bank account.”
Bad luck for businesses
While U.S. citizens can get credit for income taxes paid abroad, that kind of credit system doesn’t exist for businesses. The 2017 Tax Cuts and Jobs Act introduced two new taxes that affect U.S. citizens abroad: the Repatriation Tax and the Global Intangible Low Income Tax.
“Multinationals in 2017 got a tax cut of 22 percent,” Solomon Yue, the CEO of Republican Overseas Action, told The Local Germany last year. But “overseas Americans didn’t get a tax cut.”
The Repatriation Tax is a one-time, retroactive tax on all retained foreign earnings of US multinational corporations from 1986 to 2017. It was intended to capture income from companies like Apple and Google that earn billions of dollars outside the country. Foreign earnings held in cash and cash equivalents were taxed at a 15.5 percent rate; other earnings at 8 percent.
“While larger corporations are often able to navigate their way through these new requirements and find breaks, smaller, family-owned businesses abroad are struggling to adapt,” says Candice Kerestan, chair of Democrats Abroad.
Compliance had already been getting more complicated over the past decade. The Foreign Account Tax Compliance Act (FATCA), which went into effect in 2010, requires banks outside the U.S. to report any Americans with bank accounts to the IRS. And Foreign Bank Account Reporting (FBAR) requires Americans with more than $10,000 in any overseas account to self-report it to the IRS.
The intention was to keep wealthy Americans stashing cash overseas in line, but the effects have affected all U.S. citizens living abroad. It also affects “accidental Americans” — people born in the U.S. or to an American parent who have never lived in the United States.
The disclosure requirements also apply to any account for which you have signature authority, for example, if you’re a manager at a corporation and use a business bank account. “For foreign banks, an easy way to deal with overseas Americans is to kick them out of the banking service and deny them services to reduce the compliance costs,” Yue said.
Doyle would like to put some of his money in stocks, but he found that Deutsche Bank didn’t want him as a customer. “They said it was such a hassle for the documentation regarding U.S. citizens buying and selling stocks, that they wouldn’t let Americans open brokerage accounts,” he said. “I’m not some offshore person laundering money — I’m just a normal person trying to buy S&P 500 Index funds.”
Why does the U.S. do it this way?
Citizenship-based taxation is a holdover from the Civil War, when authorities saw taxation as a way to punish wealthy draft-dodgers who fled to Canada. Congress continued the practice of taxing citizens abroad when it introduced the modern income tax in 1913. But in the era of globalization, where more people are living and working abroad as a matter of course, the rules make less sense.
“Citizenship taxation may discourage both initial migration to the United States as well as the decision by migrants to become permanent legal residents or citizens,” wrote Ruth Mason, a professor at the University of Virginia’s School of Law, in a paper on citizenship taxation in 2016.
The only other country that operates on a citizenship-based taxation model is Eritrea, which has been on the receiving end of intense international pressure for its practices. Eritrea, a country of less than 6 million people bordering Ethiopia in eastern Africa, levies a flat 2 percent income tax on its citizens living overseas. The UN Security Council condemned Eritrea in 2011, saying the country was using “extortion, threats of violence, fraud and other illicit means” to collect taxes outside of Eritrea.
For Americans, the only way to escape the tax obligation is to give up your U.S. citizenship, which is exactly what Facebook co-founder Eduardo Saverin did in 2012. The Brazilian-born Singapore resident relinquished his U.S. passport just before Facebook’s IPO made him an even wealthier man, ostensibly to save on taxes.
Foreign Policy noted that the U.S. can deny a visitor visa to any former citizen “who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States.” The U.S. can also deny new passport applications and revoke existing passports of citizens who owe more than $2,000 to the IRS.
Renouncing U.S. citizenship is not without its own cost: The renunciation fee is $2,350, the highest in the world. (And if you owe the IRS any back taxes, those are due when you relinquish your citizenship.)
Renunciation was free until 2010, when the fee was set at $450, and in 2015 it was set at its current level. But the cost doesn’t seem to have been a deterrent. According to the US Treasury Department, more than 5,000 people chose to relinquish their American citizenship in 2017; only 530 did so in 2007.
The real kick in the pants for Emma Wood is that while she’s an American citizen, she’s never actually lived in the United States. Both of her parents are American, but Wood grew up in the U.K. and Japan. Her parents are now retired in Arizona, and her brother also lives in the States, so giving up her U.S. passport to get out of the tax obligation isn’t an option she’s considered. “The taxes are a pain in the ass, but they’re both really valuable passports to have,” she said.
Americans at a World Cup public viewing in Dresden in 2014. Photo: DPA
What the new legislation proposes
Every American we spoke to wishes dealing with taxes was easier. And one member of Congress wants to help. North Carolina Republican Rep. George Holding has been working on a bill called the Tax Fairness for Americans Abroad Act that would create an alternative exclusion for nonresident U.S. citizens living abroad and provide much-needed relief. “It is time to end this unfair practice,” Reddington said.
H.R.7358 expired when the last session of Congress ended, but Holder is planning to introduce an updated version soon and discussed the details of his plan at an event organized by Republicans Abroad in London in April.
In the plan, Americans working overseas could select a non-residential taxpayer status that would exempt them from having to file income tax returns with the IRS and would exempt them from FATCA and FBAR reporting. They would, however, still have to report and pay taxes on income earned in the U.S.
Kerestan says Democratic members of the House including Carolyn Maloney of New York, Jamie Raskin of Maryland, Dina Titus of Nevada and Don Beyer of Virginia have pledged their support for any bill that addresses taxation issues for their constituents who live abroad.
“If we want to make tax reform a reality, it is of utmost importance that we, Americans abroad, contact our members of Congress and make it known how current taxation requirements unfairly impact us,” Kerestan says.
Doyle would love to have to spend less time and money on his taxes. “If you live in Germany and pay taxes in Germany, you shouldn’t have to fill out a tax form for the United States,” he says. “If a German lives in America and files taxes there, the Germans just say, ‘Hey, where are you? Have fun, don’t get shot.’”