US Tax Returns for Individuals with German Connections

Professional Guidance from German Wirtschaftsprüfer und Steuerberater in den USA^®

Summary

Understanding Reporting Obligations for Foreign Assets and Investments

Foreign Financial Account Reporting (FBAR)
Electronic FBAR Reporting
Additional Reporting Requirements by US Taxpayers Holding Foreign Financial Assets (Form 8938)
Passive Foreign Investment Companies (PFICs)
Foreign Pensions and Retirement Accounts
Controlled Foreign Corporations (CFCs)

Kontaktieren Sie uns für eine vertrauliche Beratung.

Dr. Günther Grewe, WP RA StB CPA
+49 89 2351 3218 after 3pm CET from Germany
+1 914 816 1115
Grewe@WP-RA-usa.com
Grewe@WP-RA-usa.com

Antje Klaunig, WP StB CPA
+49 89 6151 5973 after 3pm CET from Germany
+1 914 205 6002
Klaunig@WP-RA-usa.com

Expertise in US-German Tax Matters

Are you navigating the complexities of US tax obligations with ties to Germany? Our team of German-speaking Wirtschaftsprüfer (Auditors) and Steuerberater (Tax Advisors), along with Certified Public Accountants (CPAs), are here to assist. We specialize in addressing the unique challenges individuals with German connections face in complying with US tax requirements.

Understanding the Residency Starting Date (RSD) and Its Tax Implications

The Residency Starting Date (RSD) marks a crucial turning point for foreign individuals with US tax obligations. As of the RSD, these individuals become subject to US taxation on their worldwide income and must adhere to all information reporting rules. Determining the correct RSD is essential, as it can significantly impact an individual’s tax liabilities and reporting requirements. Our experts provide comprehensive guidance on establishing the RSD based on the “green card test” or the “substantial presence test.” We navigate the complexities of RSD rules, including special cases, exceptions, and potential tax treaty benefits, to ensure our clients remain compliant and minimize their tax burdens.

Green Card Test and RSD: If an individual satisfies the “green card test” at any time during a calendar year but does not meet the “substantial presence test” for that same year, the RSD is the first day in the calendar year on which the individual is physically present in the U.S. as a lawful permanent resident (LPR) under immigration laws. Relevant tax regulations dictate that possessing a green card, even if never used, can trigger U.S. tax obligations. If an individual meets the green card test for the current year but is not physically present in the U.S. during that year, the individual’s RSD is deemed to be January 1 of the following year. This special rule highlights the stringent nature of the RSD, where arguments like “I never used my green card” or “I never set foot in the U.S.” hold little weight with tax authorities.

Terminating U.S. Tax Residency: Many green card holders must realize that once the RSD commences, U.S. tax residency continues until officially terminated. The expiration of a green card for immigration purposes does not automatically end U.S. tax residency. Unless immigration authorities or a court terminates lawful permanent residency, individuals can end U.S. residency for tax purposes by voluntarily relinquishing their green card according to a prescribed procedure. Until properly executed, resident status persists, along with the obligation to pay taxes on worldwide income and comply with tax information reporting requirements.

Substantial Presence Test and RSD: For individuals meeting the substantial presence test in a particular year, the RSD is the first day they are physically present in the United States during that calendar year.

Nuances in RSD Rules: Immigrants must be aware of the many nuances in RSD rules, which can present potential problems and possible escape hatches. For example, up to 10 days of physical presence can be disregarded if specific requirements are met for RSD purposes. Tax treaties with other countries may also provide relief under treaty tie-breaker rules. Qualifying as an “exempt individual” can exempt one from counting days of physical presence, which can impact the RSD. These exceptions require detailed analysis and planning but can provide significant benefits for those navigating the complexities of RSD rules.

Our Comprehensive Services Include:

Tailored US Tax Return Preparation:
- Specialize in all income types
- Provide expert advice on double taxation avoidance agreements
- Offer strategic guidance on the Residency Starting Date (RSD) and its tax implications
In-depth Guidance on Reporting Obligations:
- Assist with Foreign Asset and Investment Reporting
- Handle Foreign Bank and Financial Account Reporting (FBAR), including electronic submission
- Provide comprehensive assistance with Form 8938 for US taxpayers with foreign financial assets
- Navigate the intricacies of Passive Foreign Investment Companies (PFICs), Foreign Pensions, Retirement Accounts, and Controlled Foreign Corporations (CFCs)
Robust Representation and Support:
- Offer strong advocacy in tax disputes
- Deliver strategic advice tailored to your unique tax situation

Contact Our Experts:

Dr. Günther Grewe, Wirtschaftsprüfer, Rechtsanwalt, Steuerberater, CPA
- Phone: +49 89 2351 3218 (after 3pm CET, Germany) / +1 914 816 1115
- Email: Grewe@WP-RA-usa.com
- Microsoft Teams: Grewe@WP-RA-usa.com

Antje Klaunig, Wirtschaftsprüfer, Steuerberater, CPA
- Phone: +49 89 6151 5973 (after 3pm CET, Germany) / +1 914 205 6002
- Email: Klaunig@WP-RA-usa.com

Why Choose Us?

Unique Expertise: Proficient in both US and German tax systems
Language Advantage: Communicate seamlessly in German
Customized Solutions: Develop strategies designed for your specific tax needs
RSD Specialists: Provide expert guidance on determining and managing the tax implications of the Residency Starting Date (RSD)

Ready to Assist

Contact us today to schedule a confidential consultation and develop a tailored tax strategy that aligns with your circumstances. Our team of Wirtschaftsprüfer und Steuerberater in den USA^® is prepared to help you navigate the Residency Starting Date (RSD) complexities and ensure you meet all your tax obligations efficiently and accurately.

Understanding Reporting Obligations for Foreign Assets and Investments

Overview:

FBAR reporting for foreign bank accounts
Electronic FBAR filing
Additional reporting requirements for US taxpayers with foreign financial accounts (Form 8938)
Obligations for PFICs, foreign retirement accounts, and CFCs
Foreign retirement and pension accounts
Controlled foreign corporations (CFCs)

Foreign Financial Account Reporting (FBAR)

Since the 1970s, reporting obligations for foreign financial accounts have existed, but requirements and penalties have increased recently. US taxpayers must disclose their financial interest in, or signature or other authority over, foreign financial accounts if the combined value exceeds $10,000 during a calendar year. Our team of experienced Wirtschaftsprüfer und Steuerberater in den USA^® can help you comply with reporting requirements.

Electronic FBAR Reporting

The report must be filed electronically. The prescribed exchange rate in 2023 is 0.905 EUR / 1 USD ( list of all exchange rates since 2001). FinCEN (Financial Crimes Enforcement Network) has issued detailed FBAR – Electronic Filing Instructions.

For more information about the FBAR, please click the following links or contact us, your Wirtschaftsprüfer und Steuerberater in den USA^®. You can also connect with us easily by phone; +49 89 2351 3218 or +1 914 816 1115 after 15h (9 am ET).

Additional Reporting Requirements by US Taxpayers Holding Foreign Financial Assets (Form 8938)

Taxpayers with specified foreign financial assets exceeding certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. The new Form 8938 filing requirement does not replace or otherwise affect taxpayers’ obligation to file an FBAR. As your Wirtschaftsprüfer und Steuerberater in den USA^®, we can assist you in fulfilling these obligations.

Penalties for inaccurate reporting of offshore transactions can be severe. A summary of potential penalties and a comparison of Form 8938 and FBAR reporting can be found on IRS.gov.

To learn more about Form 8938, please click on the following link or contact us:

US Steuerthema FATCA FBAR

Passive Foreign Investment Companies (PFICs)

PFIC rules are among the most complex IRS requirements affecting individual taxpayers. Taxpayers owning interests in PFICs face a significantly higher reporting burden than those holding interests in US-based mutual funds. Unlike US-based funds, foreign investments are not obligated to provide US investors with tax reporting information, placing the responsibility on the shareholder to determine ownership share and tax obligations.

US taxpayers holding certain types of investments in specific foreign entities generating mostly passive income must disclose them. US taxpayers investing in these funds, e.g., foreign funds or ETFs, are taxed even on the undistributed income the foreign investment generates. US taxpayers holding this kind of investment cannot benefit from the potential tax deferral created by a systematic non-distribution of the foreign entity’s income. The PFIC legislation provides options to taxpayers wanting to decrease the burden of this taxing regime.

Our team of qualified Wirtschaftsprüfer und Steuerberater in den USA^® can assist you with the IRS requirements you may face. To gain additional insights about PFICs, please click on the following links or
get in touch with us by calling +49 89 2351 3218 or +1 914 816 1115 after 15h (9 am ET).

Foreign Pensions and Retirement Accounts

US citizens spending significant time living and working abroad, as well as non-citizens relocating to the US, often possess foreign pensions or retirement accounts. These assets may lead to unexpected tax and reporting obligations. The primary concern when assessing the tax implications of foreign retirement accounts is that most overseas plans are not considered “qualified plans” under IRC 401. This means these accounts typically do not qualify for tax-deferral treatment. However, the Double Taxation Treaty and Totalization Agreement may offer relief in some cases. To find out if you are eligible, contact our knowledgeable team of Wirtschaftsprüfer und Steuerberater in den USA^® or visit www.ssa.gov/international.

Taxpayers required to file a US tax return may have to treat employer contributions to foreign retirement accounts as taxable compensation. Any increase in the account’s value is taxable in the year the growth occurs. Another primary concern is the reporting obligation that ownership of foreign retirement account assets creates. Taxpayers with foreign retirement account interests often must file informational reports, such as FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR), FATCA reporting, and IRS Form 3520.

As your Wirtschaftsprüfer und Steuerberater in den USA^®, we can help you plan and assist with your reporting obligations. For further details about Foreign Pensions and Retirement Accounts, please contact us.

Controlled Foreign Corporations (CFCs): Reporting Requirements for US Shareholders

When a foreign corporation qualifies as a “Controlled Foreign Corporation,” US shareholders who own 10% or more of the total combined voting power of all classes of stock entitled to vote in the corporation must include certain types of the CFC’s income in their US gross income.

If a US shareholder holds more than 50% of the vote or value of a foreign corporation, the company is a CFC. In this case, reporting requirements include filing an annual IRS Form 5471, which is crucial as failure to file can lead to significant penalties, even if no tax is due on the return. The statute of limitations for a tax return with a missing Form 5471 is indefinite, allowing the IRS to examine and assess taxes on items relating to the missing form until it is filed. US shareholders who acquire stock resulting in 10% ownership in any foreign company must also file Form 5471.

As your qualified tax advisor, Wirtschaftsprüfer und Steuerberater in den USA^® can guide you and ensure you comply with your reporting requirements. To learn more about CFCs and Form 5471, please click on the following links or contact us.