# International Waters?



## CaptainJack1 (Mar 25, 2020)

Hi,

I am a US Citizen living in Germany. I file my own taxes and have been doing a fine job of it. I get the Bonafide Residency in Germany, such that my German income is exempt from US tax. (Forms 2555 and 1116). 

However, in 2018 I did a little work vacation, where I sailed a boat from the US to the Caribbean (nice way to make some extra money  ), where we were in international waters. I got paid ca. $4,000 as a 1099 and am now wondering how to declare this on my US Tax Return (and possibly also on my German return). 

It was a US-registered vessel, but work entirely in international waters, and I am a resident of Germany, not the US... 

Any thoughts?

Thanks,

Jack


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## Bevdeforges (Nov 16, 2007)

I think you are fine, given that your tax home is in Germany:
https://www.irs.gov/businesses/us-citizens-performing-services-in-foreign-and-international-airspace

(Airspace being roughly the same thing as waters.)


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## Moulard (Feb 3, 2017)

The bigger thing from a US tax perspective is that this income will not be considered foreign sourced. As such it would not be eligible for exclusion under the FEIE.

I am not an international tax expert by any means but I would hazard a guess that as the vessel was US registered, it is likely that this income will be considered US sourced. 

If it is US sourced then the US would have primary taxing rights on that income. 

Depending on your broader income profile, US taxation of this income not be an issue, for example if you can offset it using the standard deduction.

If you do end up owning anything to the US on it, then as a German resident, I assume that you would then be able to claim a credit on your German taxes for the US taxes paid on the income.

Where a Foreign tax resident has US sourced income, some tax treaties allow a special tax credit; or allow the income to be re-sourced. This is to reduce double taxation caused by both countries having a primary taxing right. 

If such a clause exists it is likely to be in the Relief From Double Taxation article. I recommend you read that and the technical memorandum that can better describe the treaty terms.

https://www.irs.gov/businesses/international-businesses/germany-tax-treaty-documents


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## Bevdeforges (Nov 16, 2007)

> If you do end up owning anything to the US on it, then as a German resident, I assume that you would then be able to claim a credit on your German taxes for the US taxes paid on the income.


Many people assume that international taxation works the same way elsewhere as it does in the States - i.e. that if you pay tax to the US, then you take a tax credit on your "other" tax forms.

Let me just mention here that it doesn't always work that way. I know here in France it certainly doesn't. I'm not sure about Germany, but from what I've seen I don't believe there is a direct tax credit like that. However, you should check the tax treaty to be sure.

For other matters in German taxation, it's frequently the case that German claims the primary right to tax the income - at least for things like US SS pensions and the like. (Then the US expects you to take a Foreign Tax Credit for what you paid to Germany against your US tax liability.)

I would just assume that you are entitled to use the FEIE due to your being outside the US and having a bona fide residence in Germany. US citizens working for a company that is "registered in the US" - i.e. part of a US based company - don't lose the ability to take the FEIE. Depending on the amounts involved involved, chances are good that they'll let it ride and never give you any hassle over it.


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## Moulard (Feb 3, 2017)

There was no assumption that international taxation works the same way elsewhere as it does in the States. That said, both the US and the OECD Model treaties have clauses that allow are intended to reduce double taxation. The US model treaty has tax credits. The OECD model has both tax credits and tax exemption as options. 

On the US side, they will have chosen to offer tax credits. Germany will likely have taken an approach that would have aligned it with its other treaties.


The assumption that the OP is *entitled *to use the FEIE is wrong. 

I don't have time to dig out the case references but the US tax court has ruled that income earned in international water could not be excluded using the foreign earned income exclusion. 

s.863 clearly states that ocean income derived by a United States person is income from sources within the United States. There are exceptions, but wages earned in international waters are not part of that.

Whether or not CaptainJack chooses to comply with those rules is a matter entirely up to them. Personally, I would be entirely sympathetic to ignoring the fact that it is technically US sourced income. Its just not what one is meant to do.


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## CaptainJack1 (Mar 25, 2020)

Bonsoir Bevdeforges, 
Hi Moulard,

Thank you both for your response. I've gone ahead by claiming it as Additional Business Income on 1040, but offset it through 2555, so it's a wash - it is only $4,000... so let's see what happens for 2018. 

Now I'm working on my 2019 return, where I was unemployed. Thank you Bevdeforges for an earlier posting in 2014 on this and maternity pay through CPAM. 

A quick side-note - I am kicking myself as I read that long-term capital gains are taxed based on your income. I had purchased some tech stocks ten years ago and sold them at the end of 2018 to pay off student loans. Although I am happy to have sold them (especially amid our new Corona Crisis) and to be debt-free, I owe capital gains of 15% tax and had I waited to 2019 I think the tax rate would have been 0%.. Luckily I had enough short- and long-term loss carryover to cover this amount due. Still, if I had waited a month I could have saved my accrued loss-carry forward.

I also sold two stocks in 2019. One of them I've had for 10 years+, and the other I had for only a few days, but on both I made gains. My question is whether or not I can avoid using up my loss-carry forward if capital gains are 0% anyway (since I have no income). 

I could ask a million more questions since this is my first time doing my taxes myself (like Form 2555 vs 1116 and what is this alternative minimum tax!) but I'll stick to the most critical ones for now 

Thanks for the support. I need to save the money and I am quarantined so I have time. 

Captain Jack


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## Moulard (Feb 3, 2017)

I will try to preempt an answer to your AMT question as like most of us, I am stuck at home now, and what better way to while away my lunch break.

in 1969 the AMT was introduced to ensure that the richest 150-odd taxpayers actually paid some tax. Basically they were able to use deductions to reduce their taxable income. The AMT recalculates the tax you owe minus a bunch of deductions that were prone to exploitation.

The income caps haven't changed and this has meant that Inflation has caught up.

Basically if you are required to calculate the AMT, you end up paying the greater of the normal tax rate or the AMT rate.

Why is AMT important for international taxpayers.... because if one uses Form 1116 you have to calculate the AMT rate on your income.

Long and the short complete Part I and II of Form 6251 

AMT is calculated without the standard deduction, and without a number of other specific deductions but with a large exclusion.

If the AMT amount is zero, then that's it. If its more than zero, then it can get a bit more complicated, including creating a second set of form 1116 using the AMT tax rather than the regular tax amount.


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## CaptainJack1 (Mar 25, 2020)

*CaptainJack1*

Hi Moulard,

I filled out the AMT for 2018 and it's 0 at the bottom of Part II so I'll leave it at that - thanks.

It seems (based on some Googling and the way Schedule D is setup) that I have to apply the Capital Loss Carryover to any capital gains (long or short) right away, and if I simply don't include my Capital Loss Carryover from the previous year it is no longer valid in the future. So, regardless of the capital tax bracket (0%, 15%, etc), I my Capital Loss Carryover gets depleted. No choice. 



Any chance I can carry over a Student Loan Interest Deduction to future years if not used? I guess not... even if my AGI is very negative.


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## CaptainJack1 (Mar 25, 2020)

Hello Everyone. The quarantine continues...

Any thoughts on the loss carry forward issue I mentioned earlier, or student loan deductions? I guess deductions can't be carried.. 

have a good week,
Captain Jack


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