How do I avoid getting double taxed by Germany and USA (for USA source dividends from Stock and bond mutual funds)

[skaufmann]

Hello,

I have been trying to read and understand how I should go about this issue to prevent paying taxes for USA source dividends both in Germany and then USA (i.e getting taxed twice for the same dividends).

We are US citizens, and moved in 2022 to Germany (one spouse in June, other in October, 2022), both are now German tax residents (as we moved with intention to live there for longer than 6 months, actually more than that).

Our main source of income is passive from dividends from stock and bond mutual funds held at a brokerage in USA. Being a US citizen there is no withholding tax on the dividends. We are currently preparing to file Taxes first in Germany and then in USA. 

I would like help with a few issues:

1) I realize Germany will tax us 26.375% on these dividends (since I cannot claim that I have already paid taxes on this income in USA, since as a US citizen there is no tax withholding). Per US/Germany tax treaty, USA also reserve the right to tax 15% on the US source dividends. How do I go about filing  tax returns both in Germany and USA so I don't have to pay in taxes on the same dividends in both countries. I would also want to avoid paying taxes in both countries and  then filing again an amendment to get the taxes  partially refunded.

2) Our second issue unique to us is that we are not just partial year tax residents in both countries, but we (spouses) moved in different months.  We have received a combined 1099-DIV for the year which only shows the total dividends for the entire year,  I understand that I am liable for full tax on these dividends in US (for the partial year we lived here) and liable for taxes in Germany for the partial year we lived there (how do I report the US part and German partial year on Turbotax dividends income section).

I would really appreciate some expert advice and if someone has actually done this partial year taxation for US/Germany.

Thanks for reading.

[ErnieS0]

U.S. citizens are taxed on worldwide income, so you’ll file the same way you always have when you lived in the U.S.

The IRS has no part-year tax status for U.S. citizens. If you lived in a state with an income tax, you can file a part-year state return and report only the income you received while living in that state.

Because all your income is taxed by the U.S., you can claim a foreign tax credit on dividend income double-taxed by Germany.

1. Type foreign tax credit in Search (magnifying glass) in the upper right corner
2. Select Jump to foreign tax credit
3. Complete the screens to claim either the credit or deduction

For more help: Where do I enter the foreign tax credit (Form 1116) or deduction?

[skaufmann]

@ErnieS0 

Thanks Ernie for your time and response, I appreciate it very much.

I am still unclear about one thing: If I pay taxes in Germany first on my dividends, they will tax me 26% (since there was no withholding as a US citizen). Then If I file in USA and claim the taxes paid as FTC, where will USA get its share of taxes on the dividends (I believe the US/Germay tax treaty give USA right to tax upto 15% tax on dividends). 

If you have a moment, can you clarify that. 

Once again, thanks for your help.

[ErnieS0 · Accepted solution]

You will report dividends on your U.S. tax return as normal. This is how the U.S. will get its share of tax. However, by claiming a foreign tax credit, you’ll effectively only pay tax to the U.S. on the portion of U.S. tax that is higher than the German tax, if that’s the case.

If you kept your investments in a U.S. financial institution, you will receive a Form 1099-DIV. If you moved your money to a German financial house, report the amounts in USD as if you received a 1099-DIV.

See How to report foreign income and dividends.

I believe the treaty provisions you refer to deal with withholding, not actual tax paid. 

See Germany - Tax Treaty Documents

[skaufmann]

@ErnieS0 

So I read all rules for FTC. Since this is US source income (from US based brokerage), one would have to use a treaty based re-sourcing to claim FTC. However, treaty based with Germany limits the amount of dividend income that can be re-sourced.  I tried to fill that information in while I was doing the FTC on turbotax but there was no indication of such. Frankly it was hard to fill the information? Is there somewhere one can access examples or worksheets?

Thanks again

[ErnieS0]

TurboTax does not have any specific examples. The IRS has worksheets that you can use.

These resources may be helpful: Foreign Tax Credit - Special Issues may be helpful as well as Form 1116: How to enter the income under "resourced by treaty" category?

[rogge1722]

See pub 514 on p36 under heading "Tax Treaties" which addresses limitations regarding limitations on resourcing by treaty on U.S. citizens residing in the treaty country.  You may be able to claim additional credit.

[skaufmann]

@rogge1722 @ErnieS0 

Thank you rogge1722 for your reply.  May I ask what you meant by "you may be able to claim additional credit".

I did read the p36, pub 514, it states clearly "treaties with certain country LIMITS the amount of US source money  (here US source dividends) you can treat as foreign source. There is a worksheet to calculate that, but the instructions for the worksheet are unclear for the regular tax filer. I have been asking Turbotax experts if they know how to use this worksheet (at end of p36) (Any instructions or example would help, as the instructions provided by IRS are very crptic.

Thanks

[rogge1722 · Accepted solution]

By additional credit, see the statement on pub 514, p43 under STEP III regarding line 21.

[skaufmann]

@rogge1722 

Thanks, I will try to fill the questionaire in Turbotax and see how it fills the worksheet. I find the instructions for the worksheet a little hard to comprehend.