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.

Net Worth Update: June, 2019

In June, our net worth increased in USD 1.81% to $47,921 and in EUR 0.29% to 42.110€.

The big factors in the move this month were as follows:

• Good stock market performance. Although, in my personal portfolio, we haven't totally recovered from the May drop, the performance plus our savings were strong enough to offset some big expenses.
• We saved around 20% of our cash flow, split between the Tagesgeld account (normal savings) and the brokerage. I'm using the term "cash flow", because I get paid in post-tax money, and my wife gets paid pre-tax money. I could try to include my pre-tax withholdings.... but nah. I'll start in 2020 when I update my budget spreadsheet. Cash flow it is.
• We made a big payment to the German government for estimated taxes.
• I made a large purchase of a used item for a hobby that I'm hoping to turn into a side income stream. That was around €1.200. I have some things that I hope to sell in the next couple of months to help offset the purchase.

Year-Over-Year Tells Its Own Story

It's funny, that is a very small looking percentage change, but I also track the year over year numbers (YOY), and those show just how steady growth over time can lead to big changes. From one year ago, our net worth is up 51.61% and 55.21% from $31,608 USD and €27.132 EUR, respectively. This is after a series of (in USD) smaller changes of 9.77%, 3.61%, -1.62%, 1.98%, 5.24%, -2.49%, 17.49%, 7.58%, 1.31%, 3.73%, -4.26%, and this latest 1.81%.

That's one reason I write these updates. I'm doing this anonymously, and it's not to brag or show off that I have some saved money. Instead it's to document how small changes over time lead to big changes that are counter-intuitive.

Over this last year, compounding had almost nothing to do with the YOY change. At my level of wealth, savings is the biggest factor in terms of wealth growth. My actual stock market returns are basically zilch over the last year. I'm hoping that changes, but my activities regarding saving should be biased towards a) earning more and b) saving more vs. c) earning higher returns.

July Expectations

This will be an expensive month:

• We paid our tax advisor for two separate items.
• We paid the government to reapply for our work visas. It's surprisingly expensive.
• I'm taking a trip to the U.S. later in the month. I'll do what I can, but it will cost money.
• I might have some random bits of income coming in from small gigs. We'll see.
• My wife is working fewer hours because of the usual summer slow down.
• We are expecting a tax refund (!!!), but we won't get that until August most likely.

Net Worth Update: May, 2019

Our net worth dropped to $47,070 by 4.26% and in EUR by 4.69% to 41,990€ in the month of May.

Apparently, I own all the stocks that are effected by the ongoing trade conflicts with China, Germany and Mexico, and I was duly punished for it. Eventually, I assume there will be a resolution, but it's not fun while it's happening. But my hope of reaching 50k will be put of for some time now.

Stock Price Kill Switch

A phenomenon I've also noticed in the last year is this: some stocks seem to almost have a kill switch, where someone somewhere declares the trade done, and the stock sells off sharply and consistently over the course of a month or so. It's wild when this happens, and I've seen this happen multiple times in the past year. Eventually, the stock hits some value and then sits there, but the decisiveness and steadiness of the selloff suggests that it's computers somewhere making the decision. It just doesn't look like the actions of a human being, and there was no obvious news event that prompted the move.

Here's one example:

And here's another, possibly still in sell off mode:

Why not sell these myself? So far, they haven't violated my sell rules, so I'll just hold them, and hope that in the fullness of time, their purchase will have been worth it.

As I said in previous entries in this series, our savings rate is going to be reduced for a while. So while global securities are experiencing a downturn, I'm left out from buying at the lower prices in any meaningful amounts.

Tracking Cash-Flow with Sankey Diagrams

There's been a trend on the subreddit Data is Beautiful to display one's monthly cash flow as a Sankey diagram. There were a few days last week where the whole sub was covered in these cash-flow diagrams from different locations, and it was enlightening.

The Sankey visualization helps show the transformation of inputs into outputs, and so it's a terrific way to see how income transforms into expenses. You can build your own here:

SankeyMATIC

I did my first draft of one. It's not for my monthly spending but everything we've spent so far this year:

I'll have to update it once the year is over, and maybe I'll average things out to figure out some kind of monthly flow. As it is, we face expected but one-off large expenses at various points in the year, so I tend to think of them as yearly expenses, and that doesn't jive with a monthly cash flow chart.

A few easy takeaways:

• The "Other Spending" category holds a lot of stuff, but the main sub-categories within it have drastically different weights. Thankfully, the "Household" (those one-off expenses that my wife and I agree to purchase, such as furniture) and "Dentist" categories should substantially drop after this year. As long as we don't spend that money elsewhere that is...
• The smaller expenses are really very small. Compared to the rent, the "Gym" expense is peanuts. I think we should be careful with smaller expenses, but it really does help visualize just how important getting the big things right really is.
• The BLOW categories are surprisingly large. They also contain a lot of different kinds of expenses, and I'm half tempted to break BLOW down into subcategories just to see where that money is going. BLOW, if you'll recall, is sort of our allowances to ourselves to spend on whatever without needing permission from the other spouse. Restaurant bills fall under BLOW, which is why they're not broken out.
• Not having a car saves us a lot. I'd love to lower our "Transportation" costs even further, but, man, this is so much better than when I was driving around in the USA.
• On my next draft, I'll need to add in my automatic withholdings from my paycheck. I'd like to see how that adds up. As is, you're seeing Job 1 as post withholding, and Job 2 as pre-tax. The "German Taxes" and "Rentenversicherung" are only for our estimated tax pre-payments and my wife's payments to the social security system since she's freelance.

Net Worth Update and Prognosis: April, 2019

Our net worth rose in April 3.73% in USD and 4.80% in EUR to $49,164 and 44,054€ respectively.

I saved some money into our Tagesgeld Konto (the German equivalent of a basic savings account) and to the brokerage, but it was not a great savings month. Instead, most of the gains came from the stock market. It was just a really good month for many of my stocks.

It would be nice if we could cross the $50k threshold by the end of May, but that's very dependent on the market since May and the next few months won't be inspiring on the savings front. In fact, I expect that our savings might go negative to pay for some upcoming things. Our estimated tax payment will hit next month, and this year we'll once again be going to a Steuerberater for our German taxes. The one upside is that I expect to not owe any taxes this year once the filing is done.

I'm also going to be paying for a bunch of dental work over the next few months. Some of that will be reimbursed by various insurances, but it will still cost a fair amount up front and in total and I don't know how quickly the reimbursement will take. We'll need to draw on saved up cash to pay for that. Our bank would be happy to lend us the money using what's called Dispogeld (if you overdraft your checking account/Girokonto, they lend you the money), but I'd prefer not to. The spread between what you get from the savings accounts in Germany vs. the interest you pay on Dispogeld is laughably wide. The Dispogeld costs 10.45% per annum, and it accumulates on day 1 and is payable at the end of the month, while the Tagesgeld gets 0.03% and pays out once at the end of the year. It's bizarrely lop-sided.

De-Identifying With Your Profession

I've been questioning my sense of identity recently, and the foundation for that questioning was thrown in sharp relief this weekend. A lot of my personal self-worth is tied up in my job and my relative position within the job, and I've had some recent experiences that show me just how unhealthy that is.

Basically, if I had a good day, my ego would get puffed up with an inflated sense of self-worth. If I had a bad day (whether it was my fault or not) I'd feel bad about myself and wonder where I went wrong and what I could do to get back in the good graces of anyone who seemed anything less than 100% thrilled with me. This would seep into the rest of my life.

This last weekend drove the point home. I got a phone call that reinforced my importance to the company. A phone call a few hours later left me in despair. I have the same job today that I had on Friday, but over the weekend I went through an emotional boom and bust cycle.

The reliance on a profession is a terrible base for self-identity, because professions are so subject to the influence of others' whims. Since I'm not my own boss, the decisions my immediate bosses make about my life have an incredible effect. But those decisions are based on factors almost totally, like 98%, out of my control. If I base my self-worth on those decisions, I'm only setting myself up for disappointment.

But I think we're all more or less under that delusion. Our economic value to the world is encouraged as a form of self-identification. We get it as kids with the question, "What do you want to be when you grow up?" and we see it in TV shows and movies when a job is the focal point of the hero's story. A lot of hobbies are essentially jobs in disguise, and a lot of creative encouragement and artist celebration is essentially just job celebration. "Look how important they are. You want to be important too, right?" or "Your current job might not fulfill you but maybe this other one over here will, so you'd better get cracking."

Which is not to say there's no joy in jobs or any kind of job stand-ins. It's the self-identification that's risky. And the sheer fact of the collective effort at this form of self-identification should give us pause. Why so much effort?

One reason I save money is to further distance myself from my profession and to emotionally insulate myself. I want to be able to walk away should someone ever truly emotionally destructive appear at my job.

But should I ever really reach some kind of financial independence where I could leave my job, I'll have to go through a final de-identification, because, despite everything, I do identify with my job and my profession. The day I leave it will be a very strange day. After all, I moved across the Atlantic ocean for it, and that fact certainly means I'm more vulnerable to major identity disruption by disturbances to my professional life.

But I've left parts of myself in the past before, and I'll have to do it again. We all will at some point.

This is the part where I should offer an alternative for healthy self-identification, but I can't. Any external base of self-identification also opens you up to disappointment and forced reappraisal. Some kind of internal mental work has to be done over time, but what shape that takes is individual.

Net Worth Update: March 2019

Our net worth increased by 1.31% to $47,396. In euros it was up 2.34% to 42,037€.

We had some expenses that were unavoidable. We had to pay our quarterly taxes in Germany, and we had to buy some new glasses for my wife. She also took a vacation to the U.S. that cost a bit of money.

The stock market was a big tease this month. In the final weeks, our portfolio experiences wild volatility. One day jumped a lot, and then the next fell a lot. Nothing to be done about it. The market feels very sensitive right now, and I wish I could say that I can resist it, but on big down days it's hard not to feel personally stung. That's especially true if the weather is bad, which it often is in Germany.

I'm noticing a trend in our early year savings rate. Usually, in the first few months of the year, there are a bunch of expenses and adjustments that eat into our ability to save. The German social security and health insurance adjust, and we have to make our new - usually - elevated tax payments.

Lastly, whatever costs for vacations and things like that tend to cluster around this time of year as we make final decisions about what we want to do with our free time in the summer.

We're going to continue having to make big spending decisions over the next few months, so I'm expecting our savings rate to be depressed for a bit. I have gotten some extra work at my job, which will help elevate my earnings, so I'm hoping that can offset some of our savings inefficiency.