2018 American Tax Return Sent

This is a post where I have to emphasize: none of this is advice. It's documenting my decisions and experiences, but you should do your own research and/or speak to professionals before taking any actions regarding tax decisions.

On Friday, June 14, I stuck the wad of papers comprising our U.S. 2018 tax return into a large envelope and mailed it off. My wife and I have to do this process every year, and it’s one of the pleasures of an American living abroad.

Since the US taxes people based on citizenship rather than residency, Americans living abroad are required to file every year with the IRS regardless of whether they owe anything or not. More often than not, those Americans owe nothing year after year, and the process feels completely unnecessary. It ends up being a lot of paper work to say, “Hi there, I still live abroad and pay taxes abroad, and therefore, I shouldn’t have to pay anything back in the US.”

In our circumstances, we have to take the following steps to file without problem:

Buy TurboTax

I’ve been using them for years, and the product works. It nevertheless feels silly to have to shell out any money for this every year when I neither pay nor get paid once the filing is done.

Gather the Information

Even though we exclude our income from taxation using the Foreign Earned Income Exclusion (FEIE), we nevertheless have to document it with as much precision as possible. I print out the bank deposits each of us receive and create a spreadsheet listing the pre-tax sum we earn followed by the USDEUR conversion afterwards on that day to get a total USD total.

Since we also take the Foreign Housing Exclusion, I add up those sums as well with the appropriate conversions.

Since we have stock investments, I print out our brokerage forms as well as auto-import the transactions into TurboTax via the broker itself. That’s very handy. But without any earned income, it’s very hard to actually realize enough income from investments to warrant any taxes being paid.

Apply for the Form D/USA 101

The US has a Social Security agreement with Germany saying a lot of things, but most importantly for us, it says that self-employed people who pay into the Rentenversicherung system here don’t have to pay self-employment taxes back in the US.

This is one of those things that might be confusing if you’ve never been self-employed. When you’re self-employed in the US, you have to pay the full amount of Social Security and Medicare taxes, while employees have to only pay half while the employer pays the other half. Only if you reach a certain threshold of income do you have to concern yourself with the actual income tax.

When you exclude income on the tax return, you’re excluding it from income taxes. But you’re not excluding it from self-employment taxes. That’s a different process, and it involves getting documentation from the resident country saying that you’re in their system. That document in Germany is the Vordruck D/USA 101.

We apply for this in January for my wife, and we get the form typically a month and a half later. It’s a simple form saying what her job is and the dates the form covers and that she’s paying into the German system.

But we have to include it, otherwise we’d be expected to pay self-employment taxes on her income. Instead of filling out the Schedule SE, we just add a statement on one of the lines of the 1040.

Automatic Extension

Because we live abroad and are out of the country on the normal filing date, we’re entitled to an automatic two month extension to file. One doesn’t need to apply for this, and instead you have to write a statement requesting it when filing. I write this out in a word processor, and we both sign it.

Pack it Up and Ship it Off

Then we stick all this paperwork in an envelope and send it off to Texas. Because of the paperwork, E-filing is not an option.

And in the end, TurboTax says something like “Wow, you’re neither getting any money back, nor do you have to send any. How strange.” Yes. Welcome to the world of US tax filing for US expats.

Possible Future Headaches

Some things we might have to worry about in the future but haven’t so far:

• Declaring foreign accounts worth more than $10,000. So far none of our German accounts have reached that threshold, so we’ve been spared.
• Declaring foreign assets.
• Using the Foreign Tax Credit. I’ve considered using it to contribute to an IRA (a different post in and of itself), but it so far hasn’t made enough sense. For example, if I decline the Foreign Earned Income Exclusion, I’d use the Foreign Tax Credit to avoid paying US taxes. But you’re locked into that choice for five years, so I’ve always just used the FEIE. This will definitely become a challenge when I’m paying German taxes on dividends and capital gains, however.
• Complicated income or asset sales. For example, if I ever did any serious side work as a freelancer, I’d have to figure out how to file that in the US. It’s never really been clear how to do that. Likewise, if we ever bought and sold a house for a profit, I’m concerned how that’d be handled.

December, 2018 Net Worth Update and Year End Review

UPDATE: I made a mistake when I initially posted this. In my spreadsheet, I double counted one of our credit card liabilities. We were still down for the month, but not quite as much as I originally wrote here. The updated numbers are $37,014.97 and €32,497.78 respectively. I'll leave the post as-is though since from a high level it remains correct.

Our net worth dropped in December to $36,153.59 or €31,741.52. That's a one month change of about -4.75%.

Since the majority of whatever wealth we have is in the form of stocks, we were hit hard by the sell-off in equities. Anyone paying attention to the markets this past month would have seen the kind of fast paced elevator down that market pundits have been scaring us about for years. Our savings rate didn't spare us from the damage.

We're still well up from a year ago though, and that's the perspective I want to keep in mind. Equities are for long-terms positions. I'm not a trader, and month to month moves whether up or down can only cause heartbreak if you get too emotionally invested in them.

This month had a few novel transactions worth mentioning. I got my Christmas bonus, which I always appreciate. At the same time, we had to pay our estimated taxes to the German government for the fourth quarter, so it was basically a wash. We also received a bit of Christmas money from relatives and a larger sum from a relative specifically earmarked to support a hobby of my wife's.

Year-End Review

So how'd we do this year? Our net worth is up around 33% in dollars from one year ago. That's entirely savings-rate based since our equity positions have been all over the place. As that net worth number grows, any year over year growth is going to come increasingly from investment performance.

Investment Performance

And my investment performance this year was bad at a YTD drop of 13% (I'm only considering my taxable brokerage account). Some of it was just the way the markets moved. For people following the US markets, it was a volatile year with big drops in February and then the last months of the year, but if you were invested in just about anything outside of the US, ho ho ho, you had a rough year.

How could I have known that at the exact moment I'd begin investing in German companies, it was at the peak of the German market? I began buying in October 2017, and this chart is the daily chart of the DAX from the past year:

It's actually uncanny how some of my German purchases happened at the exact tops of their cycles. The companies seemed cheap when I bought them, and they seem cheaper now, but that doesn't mean anything in the near term. The German companies were a drag on my performance over the whole year, even when I was doing well in other parts of the portfolio.

Some of the bad performance was from me trying things and discovering I don't have the temperament for them. I tried shorting some stocks, and I tried day-trading a few times. They're not my thing, and I'll avoid those activities in the future. Doing either triggers too much adrenaline and fear in me. Regardless of investment performance, I just don't want to live like that.

I also changed investment strategies in the middle of the year. I did a lot of backtesting and research to come up with a reasonable strategy, and I implemented it. I'm trying to control risk as best I can with smart position sizing and clear sell rules, but I do recognize that this strategy can be extremely volatile. As we get older, I have some ideas for how to reduce risk further within this current strategy, but for now, I'm being aggressive within my rules.

Recognizing my previous mistakes, I wrote a long document explaining the strategy and the rules. I've already referred to this document at times when I doubted my current approach, which makes this one of the best decisions I've made all year money-wise.

Savings

For our savings, we were somewhere around 25%. It's not exceptional, but it's not horrible either. I'd like to get this number up in 2019, but there are some genuinely life-improving expenses that may need to take priority if they become a possibility.

In 2018, the big overarching expenses were our rent as well as a trip we took to the US. Moving doesn't feel worth it. Rents are going up in Germany, and by staying put, we get to keep our rent stable while prices rise around us. I've looked at smaller apartments in our neighborhood, and their prices are approaching ours despite their smaller size. We could move further away, but our life satisfaction would plunge. Plus, my wife doesn't want to move, and neither do I.

After deliberation, I am going to the US this summer. I bought tickets using credit card points, and my wife and I will take our trips separately. I'm not thrilled about that entirely, to be honest, but the cost savings are enormous to having more focused trips back rather than larger multi-family tours. She can also work while I'm in the US and vice versa, so there's less opportunity cost.

We saved a bit on our tax preparation costs too. There are some tax people recommended to expats like us who speak English, but ouch they can charge a lot. They're very good, so don't get me wrong, but at some point you have to ask if what you're getting is worth the unusually high price. In our case, we were getting our taxes back in two weeks (fast) and we could communicate in English. But we speak German, so why not find someone less expensive who's good enough?

We could also do our own taxes, but for now I'm more comfortable with a professional in Germany on our side, and I'll keep doing my own US tax return.

So there's a wrap-up of the year for this abroad saver. I've learned a lot this year, and here's hoping for a more effective and smarter 2019. Cheers and have a happy new year.

Some US Expat Challenges

Before I moved out of the US, I didn't give much thought to the challenges of saving money and trying to build wealth. I was just happy to have a job, and I was happy that my wife accepted this new adventure.

But once here, it became increasingly clear that we Americans have challenges while living abroad that are unique to us. Here are some.

Filing Two Tax Returns

This is the big one. We Amis have to file both in our resident country as well as the US, and under certain circumstances we can owe taxes to both countries. There's no exit interview when you move abroad, so you just have to learn this on your own by reading the IRS website or by asking other expats. If you miss one or several returns, you're going to have a bunch of work to sort through to catch up, not to mention potential penalties.

As for the actual filing, you can use programs like TurboTax to file in the States, but TurboTax doesn't know everything. As soon as you move away from simply being an employee for a single employer earning under whatever the cutoff for the Foreign Earned Income Exclusion is, you enter a much more complicated tax situation. For example, being self-employed while resident abroad requires some familiarity with the treaties negotiated between the US and your resident country, if such a treaty exists.

U.S. Banks Probably Don't Want to Deal with You

You face an uncertain result if you tell your American bank back home that you've moved abroad. Many simply maintain an American address with a family member rather than take the risk of their bank closing their accounts. It's the same story with credit cards and investing accounts.

Foreign Banks May not Want to Deal with You

Because of the long arm of the U.S. government, foreign banks are required to disclose information about American account holders to the U.S. government. When opening an account abroad, you may be sent IRS Form W-9 from the foreign bank.

Many banks don't want the hassle, and they may simply refuse to give you an account because of it. When FATCA was passed, there were lots of stories of Americans losing access to banks and banking products. It's gotten better since then, but we always have to assume that it could happen again.

Floating Currencies and Conversion

Living abroad subjects you to currency risk. If you have any kind of financial life in the US, you will need dollars at some point, and you will then be hit with the reality of ever-shifting global currencies.

When my wife and I first moved here, the euro was worth around 1.38 dollars. In the first year, we tried just getting our lives together and didn't aggressively pay down the debts accrued to move here. Within around a year, the euro plunged in value, and suddenly we faced debts accrued in dollars becoming larger relative to our European incomes simply due to currency fluctuation.

On top of that, converting currencies costs money. If you use a service like XE Trade or Transferwise, they will charge you some kind of fee or make money by converting at a slightly disadvantageous rate. But they're much better than using a bank or one of those conversion kiosks.

Complex Rules for Investing

Once you've actually saved your money, it's unclear where to put it. Save it abroad or in the US? What kind of vehicle? Savings accounts pay basically nothing (especially in the eurozone), but when you look at equities you are entering a new world of complexity. Individual stocks or funds?  Real estate and rental income? You have to consider the taxation rules for both countries when making your decision, and you have to consider potential future changes to the law. What strategy is the lowest risk within this complex matrix of possibilities? I've made my own choices here (buying individual stocks rather than funds), but each person will have to make their own choices.

For example, buying funds as an American in Germany is really risky. If you buy funds in Germany, the US will tax them punitively. If you buy funds in the US, Germany taxes them less punitively than they used to, but I find the rules excessively complex and somewhat punitive.

Do You Speak the Language?

We are at risk, though this applies to everyone, when we don't speak the home country's language as well as everyone else. The fine print matters, and if you find English legalese tricky, it's only going to be trickier in a language you didn't spend speaking during your school years.

That list should give you an idea of what we're dealing with. In many ways, of course, we're very privileged. We chose to be abroad. We chose this country. At least in Germany, most Germans seem happy to have us living here.

But there are a lot of traps you can step in while living abroad. I'm still learning.