A Taxing Situation

Taxes, taxes, taxes… So much fun…

Seems like the government loves to make it as difficult as possible for a person to make any actual money in this country. Or, to put it more precisely, keep any of the money they’ve actually earned. This really bugs me. Now I’m sure that I’m not the only one that is bothered by this; however my rather interesting tax situation from last year is most definitely bringing to light certain scenarios that many people never have to wrestle with. If you want to feel better about your 2007 taxes, check out the crap I’m currently trying to deal with…

For starters, it’s a pretty well known fact that you should probably get a professional to prepare your taxes for you if you have any difficult circumstances to deal with (i.e. you actually want to keep the money that you’ve earned and you’ve evolved beyond the standard 1040EZ form). Heck, the best thing about this is that you’re allowed to take any fees charged for your tax preparation as a deduction. Not only do you get to pass the blame to somebody else if, heaven forbid, you’re lucky enough to be chosen for an audit; you get to lower your taxable income by the amount this poor scapegoat in waiting charges you. It’s basically a double-win for you, the customer. Unfortunately, for me, this isn’t a possibility…

You see, last year (the first year that I actually earned money in Germany – a foreign country, mind you…) I quickly discovered that finding a professional that would be willing to prepare my taxes was next to impossible. Oh I tried … believe me, I tried; however, without fail, as soon as I informed my perspective tax guru that I was living in Germany, earning money in Germany (through a rather elaborate network of tax shelters and third party interests) but needing to file my taxes as a Colorado resident – legally (or at least as close to legal as possible) – all bets were off. I found one accountant that seemed willing to take my case; unfortunately I needed to drop her after the only “useful” information I got from her was that I wasn’t eligible for the “foreign earned income exclusion” – this I already knew. She even attempted to charge me for “research completed” after I informed her that I would not be purchasing her services. It took a few emails explaining the difference between pre-sales activities and chargeable line items before she decided to drop the charges.

So I’m in the enviable position of having a rather complicated tax return to prepare as well as being forced to prepare it myself. Of course these days, with the sophisticated tax preparation software available, this shouldn’t be too much of an issue, right? Well, perhaps… I did it last year with TurboTax (I’ve actually used TurboTax since 2003) and am currently in the process of completing my 2007 return with the same software. What I’m now wondering is whether what I am doing will give me the best results for my return and, much more to the point, whether or not I’m inadvertently breaking any laws. I’m not trying to; however I’m pretty sure that ignorance is not a valid defense when the IRS decides to come after you…

I think last year’s return was correct. There’s a pretty good possibility that it was even legal. This year, however, is proving to be a bit more complicated. The first complication is that I received a rather large sum of money after returning home from Germany last year. This came from some securities that were being held for me by an institution that was handling my foreign income. You see a portion of my salary was paid to me directly in Germany whilst the remainder was diverted to a trust fund (basically an offshore account) in an effort to minimize my taxable income in Germany. The idea behind this (and, believe it or not, this is all legal – or so I was told…) is that the income placed in the trust fund could be transferred to me after returning home 100% tax free and the income seen by the German authorities would be less which would result in a smaller German tax bill. Great plan, huh? Unfortunately, in order for the tax free transfer to work, I needed to be able to qualify for the “foreign earned income exclusion” in the states. This requires that you pass either the “bona fide residence test” or the “physical presence test”. I, unfortunately, fail both tests. The result of which is that this rather decent sized sum of money – that I was hoping to obtain tax free – ends up being 100% taxable by the IRS. It’s merely seen as a bonus pay and treated just like standard income. Oh well, no big deal, I’m just going to have to make sure that it is reported as such…

Another interesting twist on my taxes this year has to do with the job I took after returning to the states. Sure, it’s a job in the U.S.; unfortunately it’s a job in California. Not a problem by itself, but my primary residence is in Colorado. So, not only do I get to wrestle with income from a foreign country, I also get the excitement of trying to figure out a multi-state tax return.

Oh well, I am where I am. I’m currently trying to figure out how not to get taxed twice for the German income (by Germany and by the state of Colorado) although I have a few ideas on how it’s supposed to be done. I’m positive that I’m going to be paying multiple thousands of dollars for my federal taxes although that’s no surprise. I just wonder how much Germany is going to be requesting – I need to get my U.S. taxable income to my new German accountant by the end of this week and I won’t really have that until I’m done with my U.S. returns. Hell, if I get all this done correctly, they should give me an honorary degree in accounting. The “professionals” wouldn’t even take this case…

bis später,

Coriolis