Double taxation on dividend income between USA and Germany. How to avoid/get credit?

[michaelkaiser250]

My wife is a US citizen and I am a Green Card holder. We are required to file a US tax return for our global income. We are currently living in Germany and are required to file a tax return here as well. The double taxation treaty between the US regulates that Investment income is taxable in the country where you reside, in our case Germany.

I want to ask about the process on how to assure that taxes on dividends I receive on assets I hold in a US brokerage account and that are reported on a 1099-D to the IRS are not double taxed?

The US tax return is due prior to the German tax return. The dividends on the 1099-D are taxed initially in the US. The German tax return (Einkommensteuer) is filed by end of October and per treaty, the dividends received in the US are taxable in Germany and typically a 25% flat rate tax is to be paid to German authorities. 

How and when can I recover this double taxation? Can I avoid paying the taxes in the US in the first place, even though they are reported on the 1099-D? If not, can I claim a tax credit after the German tax report has been issued and the exact amount of German tax is documented. Would I file an amended tax return for that in the US? Which Tax Form is required, Foreign Tax Credit form 1116? 

Your advice is very much welcome. Thanks Michael

[Anonymous_]

@pk

[pk · Accepted solution]

@michaelkaiser250  as I understand the situation here --

(a) you and your wife are both US persons ( citizen/ GreenCard ) , living and earning in Germany

(b) you have investments  in the US through US broker and expect to receive  1099-DIV / 1099-INT etc. on passive income.

(c) article 10 of US-German tax treaty is generally applicable  in your case  ( for the dividends ).  Note that there are  some  tax treatment differences  depending on the type of entity issuing the dividends.  But generally both the country of domicile and residency can tax the dividends.  There are contortions to this depending where the underlying entity is registered.

(d) given the above the easiest path may be  to use the foreign tax credit  ( form 1116 ) ---- note that is is passive  income .  Depending on your household income  you may also have to use a form 1116 ( wages / self-employment ) for foreign tax credit on income above and beyond foreign earned income exclusion limit for the year in question.

(e) In TurboTax , you you enter the dividend income just as shown on the  form 1099-DIV.   Then under deductions and credits chapter, you show the same dividend as foreign income and the taxes paid thereon.  This will force a 1116 to be populated, make sure it is shown as passive ( tick box) and fill the rest out.

Does this help and/or do you need more on this topic ?

pk

[michaelkaiser250]

Hello PK and thank you for your reply.

What you say makes sense and I will follow your guidance. I am still uncertain about the timing of the foreign tax claim I want to make.

• The German tax return (EKSt) is processed later than the US1040 in a given year. And the EKSt is based on the US return. My German tax obligation is a result of my US income stated to the IRS in my US1040.
• So, typically I would pay the German taxes at a later time, after the US return has been filed: more than likely in the following Tax Year.

1. Q: Do I need to file an amended tax return in the US, adding the German paid taxes when the amount has been stated in my EKSt? I have tried to enter it this way in TurboTax but I would have to enter a future date which is rejected. I.e., I paid 2000Euro EKSt converted to 2200US$ in the year 2021 on US Dividends  received and included in my US1040-2020. Only in the 2020 US1040 I can link the EKSt tax payments to the specific underlying Dividend income and that again requires a future date in the year 2021 in my amended US1040-2020.
2. I could amend the US 2021 return, however, here the underlying income is not specified as it was received in 2020.

Any advice is much appreciated.

Cheers, Michael

[AmyC]

The Income Tax Treaty, article 10 is for dividends. It shows the maximum % amounts due to the US based on various scenarios, with 15% being the top.

1. You can report the dividends as foreign along with any foreign tax already paid. (Exactly as @pk stated) Plus, you have your tax liability limited by the treaty. Then you can file your German return based on the US  with no amendment necessary.

2. 2020 income would be reported on a 2020 tax return. Taxes paid in 2020 go on a 2020 return. Taxes paid in 2021 go on 2021 return.

[skaufmann]

@pk 

Can you please explain exactly how this is done and how this works?

I am sorry, this is still not clear. Are you suggesting that the entire US source dividend be "re-sourced" as foreign dividend, to avoid paying any tax in USA. However, per Germany/USA double taxation treaty, US reserves the right to tax 15% of the mutual fund dividends. So in your case where and how would USA get its share of 15%.

Aren't the 're-sourcing" rules to avoid USA from taxing more than 15% (e.g. in case of non qualified dividends for high income earners?).

Thanks a bunch,

SK

[skaufmann]

Hello Amy,

Sorry, my point of confusion is in your #1. You state enter the US source dividends as "foreign source" and enter the "foreign tax paid"....and in the same line you say, then do your German tax return. But if the German tax return is not already done, where will these numbers (foreign tax paid) come from.  And if the tax is already paid (which as Michael alluded to will be 25%)...then US will tax a max of 15% more, so I am not too sure how this scenario helps. 

Please excuse my ignorance.

SK

[RobertB4444]

Since I am unfamiliar with German tax law I'm going to start by assuming that Germany has no credit available for taxes paid to the US on the income that is also taxed by Germany.

That's ok - the US does have a credit for taxes paid to Germany while you live in Germany.  The problem appears to be that the German return is due later so the credit can't be claimed on your US return until after the German return is filed.

Again, I am assuming that you can't file the German return early.  

First option is to extend the due date on your US return.  That is an automatic extension for six months that you can get just by requesting it which makes your new filing deadline October 15th.

If that is still not long enough to get the German return filed first then you can either file the US return and amend it later or file the US return late once you have the German information.  

@skaufmann