Double taxation has made my retirement abroad an expensive obstacle course

“The disadvantages of the U.S. tax system for people like me are plenty. We need to end Citizenship based taxation, especially in countries where tax rates are similar to those in the United States. I do not live in a tax haven country. I am not escaping taxes. I pay a lot in two countries, and I pay a lot in tax preparation fees.”

— Tony Salameh, an American from California who now lives in Germany

Dear Congress,

I enjoyed working abroad as an American expat on an expat package, but double taxation has made my retirement abroad an unnecessarily and unpredictably expensive obstacle course.  

I am an American that was infected with the Travel Bug starting in 2001 when I moved to Germany on a three-year work contract. This was the first time I have lived anywhere outside of my home of California. I enjoyed being in Germany and working all around Europe so much that I quickly agreed to extend the contract to four years. 

Lucky for me, my company provided benefits such that I was being taxed as if I lived in the United States (known as tax equalization) regardless which country actually collected the tax. My company also paid for all the tax preparation requirements in the U.S. and in Germany. So for me, I had effectively never left the United States for tax purposes, and so I was unaware of what awaited me as my Travel Bug took hold.

Since returning from Germany to the United States in 2005, I have been back and forth between the U.S. and Europe on similar work contracts until 2020, when I retired and moved to Germany. It took me a couple of years to realize the full impact of citizenship-based taxation that the U.S. applies.

Non-U.S. spouse gets double taxed

My wife works in Germany, earns a salary in Germany, and pays taxes on this German salary in Germany (foreign-sourced income). Makes sense right? The problem is that the U.S. requires my wife to prepare a U.S. tax return and declare this same income in the U.S. It is taxed as if she is in the U.S. and she is allowed to offset the taxes due in the U.S. with the taxes she paid in Germany. In theory, since German taxes are higher than U.S. taxes, she should not owe any additional U.S. tax. This is the case for many people. However, in her (our) case, the tax credits are limited, such that the credits for German taxes paid do not fully offset the U.S. taxes due, and therefore, she owes additional U.S. taxes. So a very high German tax rate becomes even higher when she pays additional taxes to the U.S. on a salary that has nothing to do with the U.S.. Why would anyone think that this is okay or makes sense? On top of the additional taxes owed to the U.S., we need to pay someone to complete our tax return, which costs us thousands of dollars per year. Even a simple tax return costs a couple hundred per year because of the expertise needed to deal with the complexities associated with foreign income.

Personally, I will always have to pay some U.S. taxes because I have income from U.S. investments (U.S.-sourced income), and this is ok and expected and makes sense. The problem is that this investment income is subject to a special tax in the U.S. called net investment income tax (NIIT) of 3.8% and the tax treaty between Germany and the U.S. does not address this NIIT because it was introduced in the U.S. after the treaty was negotiated and finalized between the two countries. The NIIT was put in place to help shore up the health care system in the U.S.. As Americans living abroad, many of whom will never live in the U.S. again, we will never receive any benefits from the health care system in the United States. So why does it make sense that we continue to pay this additional tax? 

Local mutual funds off-limits

These are just two examples of the double taxation that haunts American citizens living abroad. But there are also other issues that impact our lives that typically would not impact on American living in the U.S.. For example, we are unable, without significant tax reporting requirements and exorbitant capital gains rate as high as 50%, to invest in a basic European mutual fund. This 50% tax rate is in contrast to the highest tax rate for an American living in the U.S., investing in American mutual funds, of 23.8%. For this reason, we are practically forced to invest in the U.S. only, in U.S. Dollars, even though we do not earn our income in U.S. Dollars, and live in the euro-zone.  We need to transfer Euros to the U.S. to invest. Then, the earnings/gains generated on those U.S. investments need to be moved back into Euros in order to fund our retirement. This cash movement creates a lot of risk of foreign exchange fluctuation, which could completely wipe out any gains that we may have accumulated (and there is no tax credit for that!).

The disadvantages of the U.S. tax system for people like me are plenty. We need to end citizenship-based taxation, especially in countries where tax rates are similar to those in the U.S. I do not live in a tax haven country. I am not escaping taxes. I pay a lot in two countries, and I pay a lot in tax preparation fees. I expect to pay taxes at a reasonable level somewhere in the world. Americans abroad need a fair and just system of taxation that does not put us at a disadvantage. Rep. Darin LaHood’s Residence-Based Taxation for Americans Abroad Act would reduce the pain for the vast majority of Americans abroad. I urge you to look for it and support it when it is re-introduced, hopefully soon!

Sincerely,

Tony Salameh

Munich, Germany