Capital Gains Added to US World Wide Income?

[Deleted]

As part of some asset rebalancing, DH and I were thinking about selling some long held stock (from late 70s and 80s). As some of you know DH and I moved to Germany in the later part of 2009. DH and I remain US citizens but are German residents until late 2012. Our tax situation is governed by the US Germany tax treaty. So for 2011 DH's wages, and all of our investment income (other than that derived from real estate) is taxed by Germany. I just found out from our German accountants this morning that Germany will not tax the gain from the sale of stock which has been held for a year or more.

This sounds like an amazing opportunity and that we should consider selling all of our long held stocks. But something in the back of my head says no way would the US government let us get away with selling some $500k of stock (say at a profit of $200k) without taxing it somehow. Wouldn't that profit be added to our world wide income and put us in a higher tax bracket?

It still may make sense to do; but I'll need help running numbers with a simple example. Assume salary & bonus of $300k + investment income of $10k (both taxable in Germany)+real estate derived income of $30k (taxable in the US). What would be the approximate US tax liability without and with the stock sale?

Thanks!

[mwcpa]

US citizens MUST report all income from all sources, including capital gains.....long term capital gains in the US are taxed at a maximum 15% tax rate (watch out for AMT though, that is the little white lie the politicians do not want you to know about when they brag about this special tax rate).

you though, on your US tax filings, get a tax credit related to the tax you pay to Germany....

In regards to the US tax on the 300K salary and other items of income, you really should meet with a qualified tax professional... there are a lot of variables... foreign earned income (hereafter "FEI") exclusion (and related housing allowance), itemized deductions, state and local issues (related to the rental estate and possibly other issues depending on the state you used to live, or could be still deemed to live). foreign tax credit, etc., etc. way too many variables for a forum like this to address.

for giggles, assuming 2010 tax rate and rules, 300K FEI, 10K in non qualified interest and dividends, 30K in net rental real estate income, ZERO foreign tax credit on the interest and dividends taxed in Germany, ZERO foreign tax credit on the salary taxed in Germany above the FEI exclusion amount, and ZERO housing allowance for the FEI, no other deductions, this is strictly limited to the very very limited facts you share.... your US tax would approximate 69,000.... add in 200K in long term capital gains you are looking at 99,000. This result though is very very qualified based on the extremely limited facts presented... again, see a qualified tax professional who can give you a better and more informed answer.

Edit... need to add commentators disclaimer here today
"The tax related content of my posts represents a general overview of federal tax law. It should not be relied upon without an independent, professional analysis of how provisions of federal tax law apply to any specific situation.

None of the tax advice contained in any of my posts can be used for the purpose of avoiding penalties that may be imposed by federal, state or local law."

[Deleted]

Hi MWCPA,

Thanks for your response. You're right; this is a complicated question so I have forwarded it to our company paid US tax preparer. They aren't supposed to be giving us tax planning advice (the company is really the client) so we'll see what they come back with.

[Deleted]

I found this passage in the US and Germany Tax Treaty interesting;

Article 13 (sec 5): Gains from the alienation of any property other than tht referred to in the preceding paragraphs (Real Property) shall be taxable only in the Contracting State of which the alienator is a resident.

Section 6 states an exception if you own more than 25% of the stock of a company but that's not our situation.

But I know, I'm an amateur.

And besides, the other half of the treaty title is: "And the Prevention of Fiscal Evasion..." LOL. I'm sure someone brighter than I am has tried this trick before. ;D

[mwcpa]

bonnap..... be careful how you read the excerpt you are focusing on.... treaties can be confusing to read (I have not had to read the German treaty in a few years, it is quite the read as are other treaties)..... and I highly doubt that the possibility exists for a US person living in Germany can avoid paying tax to the US on capital gains... our Congress and Presidents are not that nice to we the people... now, we the corporation, I could believe that they would make a carve out for some if them (the biggest ones, not the little guys)....

[Deleted]

LOL, MWCPA, I know. I'm of the school of it sounds too good to be true it probably is. But I rather like the thought of cashing in $500k of stock with no tax consequences. . It's as good as the 2 out of the last 5 rule for personal residences...before they changed the law effective 2009 and now you have to bifurcate cap gains if you rent your house...

[commentator]

I would be willing to bet that the U.S. is not a party to any treaty with any country in the world that has a provision that would allow a U.S. citizen to exclude capital gain income from being taxed by every country.

[Clever Username]

selling some $500k of stock (say at a profit of $200k)

I don't know the answer for your question.
I won't kick you out of bed for eating crackers if you bring this along with you.
But with a 30-40 year time horizon, your returns are horrible. That's not even a 2% rate of return.
You could lock in an 10 year 8% CD in the 80s.

Let's make sure you didn't drop a decimal somewhere.