Save capital gains tax?

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FinIn
Posts: 9
Joined: Sat Jul 08, 2017 1:03 am

Save capital gains tax?

Post by FinIn »

An American friend with a taxable investment account in the US moved to Germany. Her German employment income gets excluded from American taxes due to the tax treaty. In Germany to first Euro 801 of capital gains is excluded from the capital gains tax and I believe that Euro 801 of capital gains is excluded in the US also to due to the low amount and no other US income.

So am I right that my friend should be able to save a capital gains tax in both countries if she sells and buys right back a mutual fund to trigger less than Euro 801 of capital gains?

Thanks for your thoughts and insights on this idea
SeaScape
Posts: 21
Joined: Sun Jul 11, 2021 5:16 pm
Location: Norway

Re: Save capital gains tax?

Post by SeaScape »

Your friend should be warned off altogether from having a German mutual fund. Otherwise they risk entering PFIC hell under US tax laws. PFIC laws are almost impossible for US persons to comply with. There is a certain threshold but it is rather low. I think $25,000.
TedSwippet
Posts: 5166
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Save capital gains tax?

Post by TedSwippet »

FinIn wrote: Sat Jul 17, 2021 9:53 am An American friend with a taxable investment account in the US moved to Germany. Her German employment income gets excluded from American taxes due to the tax treaty.
The second sentence above seems highly unlikely to be the case. The treaty is here: https://www.irs.gov/pub/irs-trty/germany.pdf

Article 14 paragraph 1 says:
Income derived by an individual who is a resident of a Contracting State from the performance of personal services in an independent capacity shall be taxable only in that State, unless such services are performed in the other Contracting State and the income is attributable to a fixed base regularly available to the individual in that other State for the purpose of performing his activities.
However, the treaty Protocol Article 1(a) says:
Notwithstanding any provision of the Convention or this Protocol except subparagraph b), the United States may tax its residents (as determined under Article 4 (Residence)) and its citizens as if the Convention had not come into effect. For this purpose, the term “citizen” shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of income tax, but only for a period of 10 years following such loss.
Article 14 is not one of the exceptions to the above. So her Germany employment income is taxable to both Germany and the US. She can use the US Foreign Earned Income Exclusion (FEIE) to exclude up to around $100k/year of earned income from US tax, and (imperfect) Foreign Tax Credits for the remainder.

More details in the wiki: As for ...
FinIn wrote: Sat Jul 17, 2021 9:53 am So am I right that my friend should be able to save a capital gains tax in both countries if she sells and buys right back a mutual fund to trigger less than Euro 801 of capital gains?
Not necessarily. It will depend on whether she is in a 0% US capital gains tax bracket after taking into account worldwide income, the US Foreign Earned Income Exclusion (note that capital gains are not 'earned income'), US Foreign Tax Credits, and so on.

In practice, taking capital gains can be a tax trap for US citizens abroad. Where their residence country does not tax (some) capital gain, there can nevertheless be a US capital gains tax liability that cannot then be offset with US Foreign Tax Credits. US tax for non-US residents is a minefield.
plats
Posts: 512
Joined: Mon Dec 31, 2007 8:46 pm

Re: Save capital gains tax?

Post by plats »

Looks like a yes to me. Up to EUR 801 is tax free in Germany, and up to $12,550 of any income is deducted by the standard deduction in the USA. (Single, under 65, 2021)
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