04 March, 2015

Taxes: Every American Expat's Nightmare

Source: Comic Strip of the Day.com
Oh, tax season! That dreadful time of year when normally even-tempered people want to throw their computers/tax forms, etc. out the window. Since I'm not currently earning any income and I live in Germany anyway, I'm exempt from all that, right?


Many people don't know this, but the United States requires every American citizen to pay income tax whether they live in the United States or not. Yes, you heard that right: the IRS (Internal Revenue Service, the tax-collecting agency of the United States government) taxes American citizens for income earned anywhere in the world, regardless of where the American in question lives. The United States is one of only two countries in the world that does this (for reference, the other one is Eritrea, which at least reduces the tax rate for non-residents). There are limits, though, thank goodness: the first ~$100,000 of earned income (meaning income earned from an employer but excluding things like investment and rent income) are exempt from taxation. This sounds pretty good, but there are still well-off expats out there who are forced to pay taxes on their income twice, once in their country of residence and once in the United States. But that earned income limit is high, so I should be safe from American tax filing while I'm in Germany, right?

Not quite.

Just because I don't qualify to pay expat income taxes doesn't mean I don't have to file a tax return. Since the United States is stubbornly determined that anyone earning, saving or investing money outside the United States must be trying to evade their tax responsibilities, expats are advised to file a tax return every single year, even if they don't have any income at all, just so there's no misunderstanding. In addition, the US government has taken its ruthless pursuit of foreign income and assets to draconian, and what seems to me potentially illegal, lengths and now requires foreign banks to report the balance of every financial account belonging to an American to the IRS. This explains why I had to fill out an IRS form when I opened my bank account in Germany, a requirement which I found highly odd. And I was lucky that's all I had to do.

Some foreign banks are so afraid of the new omnipotent powers of the IRS that they are refusing to allow Americans to hold accounts, and I don't blame them for their fear. The penalty for not exactly reporting the value of all assets held in accounts by American customers is high: 30% of the value of those accounts. Because of the fear the IRS now instills in even Swiss banks, some long-time American customers are being told their accounts will be shut down, and new American customers are being barred by some banks from opening new accounts or even co-signing on an account of a spouse of another nationality. Some Americans who are dual citizens, with no other logical options, are even being forced to renounce their citizenship over this.

But wait, it gets better. The troubles don't stop with deciding to renounce citizenship. In an attempt to stop Americans in this situation from renouncing, the US government, instead of reviewing the policies that are causing people to renounce in the first place, have simply raised the cost of renouncing citizenship. Yes, there is a price: $2,350, to be exact. Just a few years ago this fee was $450, but when the new tax law started a wave of renunciations, America upped the ante.

I can see where these tax laws come from and who they are intended to target. The hope was to stop the super-rich from stashing money in off-shore accounts and evading their tax responsibility, and stopping crimes like this is an admirable goal that I support. But the way it is being implemented is harming average American citizens who have no intention of doing anything wrong. For a law that supposedly targets off-shore tax evasion, it makes absolutely no sense to go after people who are legally residing in another country. The whole point of stashing money off-shore is so you can continue to live in the United States and not pay your fair share of taxes to the country that allowed you to become wealthy. The law should be targeting exactly those people: the ones who are still US residents. The law in practice ends up affecting exactly the wrong people: those who are happily living their lives, earning their money and paying their taxes outside the United States.

Those of you who are not in this situation may have a hard time understanding why this is infuriating, but it makes me incredibly angry! Because of the obsessive nature of America's pursuance of criminal tax evaders like -- apparently -- me, I spent a large part of today gathering together tax forms I didn't think I would need and attempting to file my taxes from halfway across the world. My frustration has only grown as I've run from one "free" tax filing website to another only to find that I don't qualify for free filing at all.

Don't get me wrong, I'm not hating on taxes. Taxes are crucial to keeping a country running smoothly, to building roads and bridges, to educating the next generation, and to almost every part of life you can imagine. If I were living in the United States right now, I would willingly pay my taxes to support the country that allows me to live well within its borders. What I am hating on is having to file a tax return to a country I didn't even live in for the vast majority of the past year, and potentially having to pay a second set of taxes to the US in the future, when I am not benefitting from the above mentioned roads, bridges or schools.

I hope this has been informative for American expats who are reading, both in Germany and elsewhere. I wish this was something we didn't have to deal with, but the fact of the matter is we do. We get to pay for the honor of being citizens of the "greatest country on Earth" (note the heavy sarcasm dripping from that statement), and we also have to pay to give up that privilege. And all the while we get to do extra work to cover our asses, in case the IRS decides we might be dangerous, unpatriotic tax evaders. Welcome to America, the Land of the Free.


  1. Thanks for sharing your perspective, and as you have have this wonderful comment section, here is mine as a German expat in the US, who already had the pleasure of paying taxes in two countries for two years: (As this is a public blog, I am not using my real name, but I guess you know where it is coming from :-))

    I agree with you on the problem with IRS pressuring banks to reveal any assets of US citizens. Not that German authorities hold the high ground here. They are
    paying criminals for stolen account information, I am not sure what is worse.

    Now to the part where I have a different angle:

    To my knowledge, The US-Germany-Income Tax Treaty ensures that there is no double taxation on income, even if you earn more than ~$100k taxable income.

    And although I feel your frustration of the whole PITA of filing taxes, I do think all of that what you many of the trouble you have to go through is an inevitable consequence of the goals (if I understood you correctly) you support, like paying taxes, and especially get the $$ from the rich dudes who are hiding it from the IRS.

    So lets assume we think it is OK that every US citizen has to pay taxes, even when living abroad, because the government still does all these wonderful things with our tax dollars, like build embassies to help us far away from home, operate aircraft carriers with special forces to get us out of shit if needed, or fill our hearts with pride as tax-dollar financed US athletes rock the Olympics, take care of veterans who made possible that we were born in a free world not ruled by Nazis-Communists, build the roads and bridges we will use when we come back, subsidize companies solar panels and wind turbines to rescue not only the cute little polar bears, but also everybody else on the planet etc..
    From a process perspective, how do you think the IRS is supposed to know if you are

    a) in the same income bracket as 90% of Americans (roughly only 10% of Americans earn more than 100k/year),
    b) one of the 10-percenters, potentially super rich, see more below
    c) morally corrupt tax evader who is not willing to give back to society,

    if you are not even filing taxes?

    And how are they supposed to nail your tax-cheating ass down if they cannot prove that you lied because you actually NEVER LIED, as you never filed anything that contained a lie?

    For what they know without them having the authority to get more information, you could be living the dream, spending your summers in your St. Tropez Villa, the winters in some fancy alp chalet, all financed by your tax-evasion funds stashed in some secret accounts.

    And about the super rich who are rightfully targeted by the FACTA, why and how do you limit that to a US-resident? What is your criteria for being a resident, someone who lives 183 days on US soil?
    There were cases of famous Germans who claimed to live in Monaco or Switzerland and actually did spend more than half their year on German soil, and got convicted of tax evasion. How do you know where somebody was living when? Use immigration or NSA-records for tax? That would be even more outrageous than forcing foreign banks to share their records.

    Of you give the government the authority to chase tax evaders, and some if it requires drastic measures, you cannot expect to be exempted from that power, just because you think this should not apply to you.

    Or, as the Germans say in a tl;dr-version: don't expect to get washed, but not get wet :-)

    1. The main problem with all of this is not just that the IRS is requesting reports of Americans' assets from foreign banks, it's that they impose such strong penalties for even the slightest false report that it is causing Americans abroad to lose banking options, to the point where some have to choose between keeping their money in a shoebox at home or renouncing their American citizenship (which is only an option if the person already holds citizenship in another country, which not all expats do). If the penalty for false reporting were not so high, I wouldn't have a problem with this approach. In fact, other than that provision, I support the policy and will put up with filling out some extra paperwork when I open a bank account. (It's certainly better than paying criminals to find the information.)

      In terms of double taxation, the US-Germany Income Tax Treaty does not guarantee that no double taxation takes place. It simply puts in place an amount that is not taxed (the first ~$100,000 of income that I mentioned in my post) and the option for a tax credit after that amount. The fact there there is an existing tax credit does not mean that everyone qualifies for it, and the credit does not cover all income. It seems highly illogical to me that the US can tax something like rental income for a property in another country, just because the person who owns it is American. If the transaction is not happening on American soil, how does the US have any claim on taxes from it? Also, American expats living in countries that don't have a treaty with the US may not be so lucky when it comes to double taxation.

      In terms of my own tax filing, I can expect the IRS to know about my income because they already have literally every tax document I need in order to complete my tax return. All of my income (which was VERY low for last year) and the amount of money I paid in interest on my student loans (which was much higher than I would like) has already been reported to the IRS. There is no reason I should be wasting my time, or the IRS's time, submitting a tax return that tells them what they already know. And honestly, they have much bigger fish to fry.

      As for US residency/non-residency, there are already guidelines in place at the IRS for determining when someone is considered a resident. I don't know off the top of my head how many days in a year are required to count as a resident, but I know there are already standards in place, so why not use them in this case? I also don't see any problem with using data from other agencies, i.e. immigration records, for tax purposes. In fact I expect the various agencies of the government to work together and exchange information. It seems irresponsible not to.

      I see where you are coming from with some of the points you made. American tax dollars do go toward important initiatives that help the world and I can go to international embassies when I'm abroad. But I think the blunt force approach to financial information collection, which it seems like you are advocating, could use some fine-tuning. A tax policy that is leading American expats to renounce their citizenship is clearly not working the way it was planned.

    2. Also, from a purely personal/emotional perspective, this is just one more way that I feel like the US has me trapped. I left the US to get away from the US, and now I have the NSA and the IRS on my back. I thought being a low-earning expat would earn me a reprieve from one of the more frustrating facets of citizenship, and it turns out that I have even less reprieve that I would have had if I had stayed in the US. I know my emotional response to the situation is no reason for the laws to change, but I am allowed to react a certain way to the situation I find myself in and I don't need to be apologetic about that. This post, while intended to inform, is also purposely biased. It's impossible for me to write about this topic without infusing it with my own frustrations. I'm not asking the US government to make an exception just for me, but writing this post is a way for me to deal with the anger this situation has caused me. I also hope writing about this experience might help other people who are unknowingly in the same situation, since communication from the government about expat tax responsibilities is very poor. I found out about all of this through word of mouth and I hope to return to favor by informing someone else.