There are many questions running around my mind when I think of banking, taxing, and investing as an American living in Germany. I’ve participated in workshops, attended seminars online and have asked lots of questions to lots of people. Still, I am confused on many issues, especially the German retirement programs I am enrolled in. Are they taxed? How are they taxed? Do I report them now? Do I report them later? Is one retirement program better than the other when considering the US Tax Code? I have yet to figure things out and have a definitive answer. Am I alone in feeling this way? I think not.
My first idea, of course, like all of us, is to search online for answers. That is not so easy as the internet is full of companies who want you to invest with them and/or want to prepare your taxes, so there are very few straightforward answers to be found from them until you become a client. Unfortunately, I will never become a client because I don’t have an extra $100,000 in order to invest with them. I understand their motives, but I just need some basic questions answered. And honestly, I don’t know how much a company based in the UK, France, the Philippines or Canada really knows about my specific retirement investments in Germany.
So, I thought now is the time to dig into the US-Germany Tax Treaty. I should find the answers there, right? I was not prepared for all the technical jargon, but I am persevering and working my way through it paragraph by paragraph in the sections concerning retirement systems and investments. It is not easy, but essential, at least for me.
Why read the tax treaty between the USA and your country of residence?
First, it is a challenge, a life challenge that you will be proud of forever. And it gives you bragging rights at any party you attend. It will overly impress people.
Second, if you get through it and can obtain the information you need, you are one more step up the ladder of tax code enlightenment.
Third and most important, you will have firsthand knowledge of the situation as it affects you and your money.
Wikipedia offers a great run-down of general information on tax treaties. Consider this:
The US has tax treaties with over 65 countries.
It has entered into tax treaties with other countries to avoid or mitigate double taxation. Treaties may cover a range of taxes including income taxes, inheritance taxes, value added taxes, or other taxes. Tax treaties tend to reduce taxes of one treaty country for residents of the other treaty country to reduce double taxation of the same income.
The provisions and goals vary significantly, and very few tax treaties are the same. However, most all treaties:
- define which taxes are covered and who is a resident and eligible for benefits,
- reduce the amounts of tax withheld from interest, dividends, and royalties paid by a resident of one country to residents of the other country,
- limit tax of one country on business income of a resident of the other country to that income from a permanent establishment in the first country,
- define circumstances in which income of individuals resident in one country will be taxed in the other country, including salary, self-employment, pension, and other income,
- provide for exemption of certain types of organizations or individuals.
As we all know, information on Wikipedia is to be taken with a grain of salt. This is a basis for you to start asking your own questions and doing research.
Reading any tax treaty is not a walk in the park, however, with a bit of fortitude and a good dictionary, it is possible to read sections at a time without being too overwhelmed. Keep in mind what your goal is: to understand how you and your money can stay together without running into legal difficulties.
Tracy Moede, Co-Chair
US Tax & Banking
