# Quick question about double taxation



## ina (Feb 26, 2009)

I'm living in Europe temporarily (until later this year). I left the U.S. last year in February and haven't been back since. I'm in the process of filing my U.S. taxes for 2013 (as per the requirements of U.S. citizens living abroad). I was under the impression that I can use the Foreign Earned Income Exclusion to avoid double taxation, but yesterday I figured out that I can't use it since I haven't been present in Europe for a full 330 days in 2013 (I've been present in Europe for around 315 days). In the summer of 2013 I registered my business here in Europe (I'm self-employed), so I'm required to pay taxes here (since it's my current tax home). Do I have to report my European income in the U.S. as well AND pay U.S. self-employment taxes for 2013? If yes, then it seems like it's possible to fall through this loophole and get double-taxed, at least in the first year after a move abroad.


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## Bevdeforges (Nov 16, 2007)

OK, yes you do have to declare your worldwide income (including European income) on your US tax return. However, you should be able to take the Foreign Earned Income Exclusion (FEIE). You don't need to have spent 330 days in 2013 outside the US. You simply have to delay filing your taxes until you reach the 330 days in the last 12 month period outside the US.

In your case, it sounds as though you would meet this as of February, 2014 - so get busy filing those taxes, and take your FEIE against your European income. Publication 54 explains this stuff in greater detail, but for the Physical Presence test, you need to spend at least 330 days of any 12 consecutive month period outside the US in order to qualify. 

If, for example, you had left the US June 30th, you wouldn't qualify until July 1st of the following year. But that only means that you wouldn't be able to file your return for the prior year claiming the FEIE until July 1st. (In the meantime, you file extensions, stating that you expect to meet the physical presence test on a certain date.) It's only the Bona Fide Resident test where you need to have been outside the US for a full calendar year.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Or you can take the Foreign Tax Credit on that income, a path worth checking since you're now living in a comparatively high income tax jurisdiction.


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## ina (Feb 26, 2009)

Thanks Bev and BBCWatcher for your reply. I appreciate it! Yes, it looks like I would qualify for the FEIE under the physical presence test. But when I looked at Pub. 54 it says the following under section 3 Self-employment tax (page 11): "You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income that is exempt from income tax because of the foreign earned income exclusion."

Do I understand this correctly that this means that in my case it doesn't matter whether I take the FEIE or not? Because I pay tax on ALL self-employment income anyway. So no need to exclude my foreign earned self-employment income. Is this correct?


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## BBCWatcher (Dec 28, 2012)

If you are paying social insurance taxes into the social insurance system of a country that has a social security treaty with the U.S., you don't have to pay the U.S. self-employment tax. Otherwise, as a self-employed individual you do.

If you do have to pay the U.S. self-employment tax, that means you're still covered by U.S. Social Security, and you're accumulating additional credit toward your future U.S. Social Security retirement benefits. So you are and will be getting some direct financial benefit from paying those self-employment taxes if you have to.

You said "Europe" and didn't name the country. If you're paying social insurance taxes in any of the following European countries you do not also have to pay the U.S. payroll tax: Italy, Germany, Switzerland, Belgium, Norway, United Kingdom, Sweden, Spain, France, Portugal, Netherlands, Austria, Finland, Ireland, Luxembourg, Greece, Denmark, Czech Republic, and Poland.

Note this is on a "covered income" basis, I believe. If somehow you're only paying social insurance tax on, say, the income you earned from July through December, you'll have to make sure you pay U.S. self-employment tax on your income from January through June. You've got to be in at least one treaty system for every portion of your earned income.

No, you cannot shield your self-employment income from the U.S. self-employment tax using the FEIE or FTC. Only contributions (payroll taxes) to a treaty country's system can shield you from the U.S. self-employment tax.

By the way, please note you've got until April 15, 2014, to make any IRA (such as Roth IRA) contributions for tax year 2013. That's a whole other subject, so ask if you want some information on that.


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## ina (Feb 26, 2009)

Thanks BBCWatcher for your detailed reply. That makes sense. I'm currently in Germany but will be here only for a few more months and then I'll be back in the U.S. I pay taxes on my self-employment income here, but I guess for the 2013 tax year I will have to pay self-employment taxes on all of this foreign earned income in the U.S. as well (since I can't shield my self-employment income as you mentioned and I also just figured out today after reading Pub. 54). And thanks also for pointing out contributions to IRA accounts. I already made my contribution, but it sure can be useful info for others.


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## Bevdeforges (Nov 16, 2007)

Ina, I think you're confusing taxes and self-employment taxes. The FEIE applies only to US income tax - and so you should be able to exclude all your self-employment income made while you were working in Germany from US taxation.

Self-employment tax is another term for US Social Security contributions. In the US, your employer pays half and you pay the other half. But if you're self employed, you pay both halves, for a total of 15.3% of your earnings from self-employment. (The same earnings amount you aren't paying income tax on, thanks to the FEIE.)

But, if you're enrolled in the social security system in the country in which you are living, and they are one of the countries that has a social security treaty with the US, then you don't have to pay the "self-employment tax" of 15.3% either.
Cheers,
Bev


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## DavidMcKeegan (Aug 27, 2012)

Since Germany has a totalization agreement in place with the US, that will actually exempt you from paying those self employment taxes to both countries. 

As such, for the months you were paying SE taxes in Germany, you should not have to pay them again to the US (however if the rate you are paying in Germany is lower than the US, you may have to cover the difference). Generally you can obtain a certificate of coverage from Germany that shows what you have already paid in SE taxes, and then apply that to your US return.

You would however be responsible for paying SE taxes on any earnings made before your move abroad (i.e January)... You would also be taxed on that January income as normal, as your FEIE would start excluding income beginning in February (based on using the Feb-Feb year for FEIE purposes).

Hope this helps!


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## BBCWatcher (Dec 28, 2012)

DavidMcKeegan said:


> (however if the rate you are paying in Germany is lower than the US, you may have to cover the difference)


No. If you're contributing into a treaty country's social insurance system at their rates, you're done. There is no U.S. "top up." Payroll tax is not income tax.


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