American living abroad

[meg_shannon]

Our family is contemplating a extended or permanent move to Germany. My husband would still be employed by his current, American, employer. I have found a lot of information pertaining to living abroad and being employed by a foreign employer, but not our situation (foreign home, American employer).

Last year we also lived abroad, however it was under 12 months and split between two calendar years, so our tax situation remained the same.

So far it's my understanding that we would receive a federal tax credit for any German taxes paid. I'm unsure whether his income would fall under the foreign earned income exclusion. Also, perhaps if someone is in a similar situation, I'm unsure if we would have to pay German taxes on 401K and traditional IRA contributions.

[bwall]

While in Germany, would you be paid by the American company in the USA, or through a German subsidiary to a bank in Germany?

In other words, will payroll be run through the American system or German system?

[beltim]

So far it's my understanding that we would receive a federal tax credit for any German taxes paid. I'm unsure whether his income would fall under the foreign earned income exclusion.

You can only claim one of these two.  My guess is that the German taxes are higher than the US, so the US Federal Tax Credit would be more valuable to you than the foreign earned income exclusion.

[meg_shannon]

While in Germany, would you be paid by the American company in the USA, or through a German subsidiary to a bank in Germany?

In other words, will payroll be run through the American system or German system?

He would be paid by an American company in the USA, and would need to transfer any necessary funds to a German bank.

[belgiandude]

While in Germany, would you be paid by the American company in the USA, or through a German subsidiary to a bank in Germany?

In other words, will payroll be run through the American system or German system?

He would be paid by an American company in the USA, and would need to transfer any necessary funds to a German bank.

That seems weird. If longer than half a year in european country one need to pay taxes there. (unless there are some exclusions)

[SunnySaver]

So far it's my understanding that we would receive a federal tax credit for any German taxes paid. I'm unsure whether his income would fall under the foreign earned income exclusion.

You can only claim one of these two.  My guess is that the German taxes are higher than the US, so the US Federal Tax Credit would be more valuable to you than the foreign earned income exclusion.

Right, if you exclude income using FEIE, then you can't take a US credit for foreign taxes paid on that income.

Being employed by an American company and being paid in USD directly into an American bank account does not disqualify you from the FEIE. It does probably mean you will continue paying Social Security taxes, so those earnings will be included in your future benefit calculation.

You'll have to compare options (FEIE vs. credit vs. deduction) and pick the best for your specific situation.

I am not familiar with German taxes and don't know whether they will tax your traditional 401k/IRA contributions. Don't forget to check for relevant tax treaties, which may have specific provisions to cover it.

[pbkmaine]

Find out if his company has hired an accounting firm to do taxes for its expats. This is a frequent benefit.

[bwall]

If he is working in Germany, but paid in the USA, it seems to me that it would be very hard for the German gov't to track his pay.

Conversely, if he is paid in the USA, it *may* be hard to convince the IRS that he is in Germany. Is it possible to check that box when filling out information for payroll? "Living outside the USA" ?

[SunnySaver]

If he is working in Germany, but paid in the USA, it seems to me that it would be very hard for the German gov't to track his pay.

Probably not as hard as you think, at least to cover the majority of cases... I don't know anything about Germany, but another country I know does this: to get a work permit for a foreigner as a local employer, you must disclose the salary to be paid, and they explicitly allow salary paid both locally and overseas. The salary must be in line with norms for the position or you won't get the work permit in the first place. Should the employer's earnings report (equivalent of US W-2) and/or the employee's tax return vary considerably from this declared salary, the authorities are very quick to investigate.

Conversely, if he is paid in the USA, it *may* be hard to convince the IRS that he is in Germany. Is it possible to check that box when filling out information for payroll? "Living outside the USA" ?

As with everything else on your US tax return, the IRS may ask for documentation. If you exclude income using FEIE or claim a credit for foreign taxes paid, then of course you should retain appropriate supporting documents. Payroll in the US should be aware of the situation. Depending on your state tax situation and residence status, they may need to block state tax withholding and reporting.