Leaving the USA there is one thing no one is able to leave behind – the Internal Revenue Services or the IRS. Taxes are nothing to sneeze at and many expats or digital nomads learn this the hard way.
It was Benjamin Franklin who first said that there are only two things certain in life: death and taxes. There is still insufficient proof about the second part being true but the first one certainly is, the IRS is a reality that can’t be easily escaped even if physically one may find oneself far away from home.
It turns out, the United States is one of the only two countries in the world that taxes based on citizenship rather than residency (the other one being Eritrea for the curious mind), that means no one is able to escape the claws of the IRS. Even if there are no earnings involved and someone just spends their retirement years abroad and would not have to pay taxes on zero earnings, filing taxes is still necessary. And e-filing (electronic filing) is getting increasingly difficult, if there is only one mistake made in the past, electronic filing might be restricted and filing may be done by paper or if physical presence is not possible, there is a process called electronic notarization, a process during which both the client and the notary sign the official papers electronically.
For many tax preparers, losing the ability to e-file is a devastating blow tantamount to losing the ability to earn a living. As you may know, E-filers are subject to very stringent rules of behavior. Many practitioners have been bounced out of the e-filing program for some seemingly minor offenses and find they have little or no recourse. Some in the IRS and Congress want to make all tax preparers (not just e-filers) subject to these same rules. Also, some states are moving in the direction of mandatory e-filing. The IRS may suspend a participant for any one of the following reasons.
– Failure to file timely and accurate Federal, state, or local tax returns, including returns indicating that no tax is due (unless the applicant did not have a legal filing requirement);
– Failure to timely pay any Federal, state, or local tax liability;
The IRS seems to recognize that the rules as written are much too harsh, but it is absolutely necessary for students and expats to be clear about the provisions from the IRS. Being a resident in Germany, one needs to look up the rules pertaining to U.S. expats in Germany and file their taxes accordingly. Failing to do so would only lead to more pain down the road.
There is a certain income limit that changes each tax year and earning less than that means there is no tax owed to the U.S. government but filing is still absolutely necessary. The Foreign Earned Income Exclusion (or FEIE for short) currently stands at $105,900 per tax year and it covers most expats and the vast majority of expat retirees. Most types of income are covered under FEIE, any pay received from the USA or abroad counts toward income exclusion. However pay for services conducted in international waters or in the US military doesn’t count towards income exclusion so make sure to read the fine print.
Besides that, as an expat you have to make sure to report any foreign bank account you own in order to be compliant with the Foreign Account Tax Compliance Act or FATCA for short. FATCA is not related to yearly income but to declaring any assets held in foreign accounts. Failing to report them may incur severe penalties and as banking becomes more transparent worldwide, it is wise to not forget reporting any foreign account.