Americans Abroad

They don't always exercise them, of course, but they can.

If you have a US passport, you are responsible for US taxes, period. You do get a credit for taxes paid in other countries, and if you live in another country, and the tax rate there is higher, then THEORETICALLY you get a credit toward your US taxes and don't owe any. There are, however many exceptions to this rule, especially concerning income from certain designated kinds of sources. These are all spelled out in the double taxation treaty. In my case, where 100% of my income is from American sources, the Germans have chosen to completely ignore the clauses of the double taxation treaty that apply to me, and demand that I pay taxes on income I have already been taxed on in the USA, and which is supposedly excluded from German taxes as laid out in the treaty. I already paid my US taxes on that income in 2011, and with the Germans demanding that I pay over 50% to them as well, I am in the 105% tax bracket (or somewhere thereabouts), and have lodged a protest. If it is disallowed, my wife and I will have to leave the country, as I cannot survive on -5% of my income.

There is also the issue of my Roth IRA. I made the conversion before I moved my legal residence to Germany, paid my US taxes, and therefore under US law owe no further taxes on my IRA. When the Bush recession had done its damage to my portfolio, and it was clear to me that the value of my IRA under an Obama presidency could only go up, I made the conversion, so any gains after that point would be tax free (that is the definition of the Roth conversion--if the value of your investment goes down, you don't get to write it off, either). The Germans are making noises about wanting to tax me on my fully taxed (under US law) retirement funds as well. Apparently there has never been a ruling here about an American citizen with a converted, tax-paid (but not yet paid out) Roth IRA moving to Germany. My wife and I could live very well for several years on the difference, and I am not about to let the Germans pour half of my retirement fund down the black hole of Greece's debt just because there aren't enough German pockets left to pick.