At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and permanent residents living in Germany for over 15 years. Our clients hail from all parts of Germany - Berlin, Munich, Hamburg, Frankfurt and Stuttgart.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country. The expatriate Foreign Earned Income Exclusion ($92,900 for 2011 and $95,100 for 2012) can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
We have many clients living in Germany and know how to integrate your U.S. taxes into the local income taxes you pay. Any German income tax you already pay can be claimed as against the tax liability on your U.S. return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Germany for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple year returns at once and get in full compliance with the IRS.
Unfortunately, unlike most countries in the world, you must also file your taxes on worldwide income so long as you are a U.S. citizen or green card holder. You always have the option to give up your U.S. citizenship - by following proper IRS and State Department procedures you can surrender your U.S. Citizenship and therefore cut off your obligation to file U.S. taxes in the future. You must surrender the Citizenship for non-tax avoidance reasons and then can usually only return to the U.S. for no more than 30 days per year for the subsequent ten years. This is another service that we have provided many clients in the past.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax and legal concerns; we look forward to working with you.
Below we include information on the German Tax System for American expatriates.
Know your status, both here and in your homeland.
Expatriates living in Germany can be subject to German taxes, especially if they have German source income. The German tax system is similar to the structures in other western countries. You pay income taxes throughout the year, usually with an employer deducting tax from each paycheck. Adjustments are then made at the end of the year for possible under or overpayments.
Individual Income Taxes
In 2009 an income of less than €7,834 is tax-free for a single person (€15,668 for a married couple). Incomes up to €52,152 for a single person (€104,304 for a couple) are then taxed with a rate progressively increasing from 15% to 42%. Incomes over €52,152 (€104,304) up to €250,000 (€500,000) are taxed at 42%. Amounts over those are taxed at 45%. In addition to this there is the "solidarity surcharge" of 5.5% of the tax, to cover the costs of integrating the states of the former East Germany.
As in many other countries, Germany allows a variety of deductions that can lower taxable income. Deductions are granted for circumstances such as children under 18 (or under 27 if still attending school and without earnings), specified insurance premiums, charitable and political contributions to German entities up to certain limits and unavoidable extraordinary expenses above a certain limit (such as illness).
Deductions from compensation are also made for four social programs; retirement, unemployment, health insurance and long-term nursing care. Payments for these programs are normally borne equally by the employer and the employee. The employer's share of contributions is not considered as taxable income to the employee and the employee's portion is tax deductible up to a certain limit. A tax adviser can tell you more about other deductions and the requirements to earn them.
If an individual is subject to German tax, generally most sources of income are then taxable. The Lohnsteuer (wage tax), which alone accounts for a third of the German government's revenue, is withheld at source from compensation. Income from other sources (e. g. self-employment, fees for services, rent collections, investments and the like) are covered by theEinkommensteuer (income tax).
The Lohnsteuer differs from the Einkommensteuer only by the method of collection. TheLohnsteuer is collected at source and paid directly to the Finanzamt (tax office) by the employer while the individual must pay the Einkommensteuer himself. Therefore theLohnsteuer is comparable to the income tax withholding shown on the U.S. Form W-2 (Lohnsteuerkarte).
Based primarily on your final payment for the previous year, the Finanzamt will estimate your tax for the current year and require you to make prepayments (Vorauszahlungen) of a quarter of the tax on March 10, June 10, September 10 and December 10. The total tax liability is determined by filing an income tax return, which includes all types of income from all sources. Wage tax withholding as well as provisional payments are deducted from this total tax liability so that a refund or final tax payment is assessed. The tax assessment is usually issued by the Finanzamt between two and six months from the date the return is filed. No payment will be due before receipts of the tax assessment notice.
Every tax return is under audit, therefore if the tax assessment is issued and is not preliminary, the assessment can only be changed in the future by the occurrence of extraordinary circumstances (e. g. tax evasion).
As a rule, the income tax return (Einkommensteuererklärung) should be filed by May 31 of the year following the one in which the income was received. If you use the assistance of a tax consultant, you have an automatic extension to file until September 30. There may be penalties and interest assessed if the return is filed late.
There are a few situations where the taxpayer is required to pay taxes even though the income is less than the personal allowance, especially when tax-exempt income (such as foreign-sourced income) must be considered for the determination of the applicable income tax rate (progression clause). Taxes are then assessed based on a sliding scale.
There is an "unofficial" tax calculator available online that can give you an idea of what yourEinkommensteuer or Lohnsteuer might be.
Click here for the calculator. This should take you to the Wage Tax Calculator. Click on the top right for the Income Tax Calculator.
Other Taxes
In addition to the various forms of income tax there is also a series of sales taxes that significantly impact both individuals and businesses. The major tax is the Mehrwertsteuer (value added tax), which accounts for a quarter of the government's revenue and is second only to the Lohnsteuer in this regard. The Mehrwertsteuer assesses a levy on each step in the production and delivery of most items available for purchase. It applies to services as well as goods and the standard current rate is 19%. A reduced rate of 7% currently applies to certain products, including food and printed material. Medical and insurance services are generally exempt, as are exports of goods abroad and services rendered abroad.
Numerous other items, including gasoline, alcoholic beverages, tobacco products, tea and coffee, carry sales taxes in addition to the Mehrwertsteuer. There is also a church tax (Kirchensteuer), of 8% to 9% of the Einkommensteuer/Lohnsteuer. But you are not required to pay the tax unless you wish to be officially affiliated with one of Germany's established churches; usually Catholic or Protestant (Evangelisch).
All in all there are approximately 30 different types of taxes, including taxes on inheritances, real estate and motor vehicles. There is even a tax on the gross amounts received by the state-run lotteries, though the distributions to the lucky lottery winners are tax-free.
Due to the complexity of both the U.S. and German tax systems and their interaction with one another, it is always recommended that you hire a tax consultant (Steuerberater/CPA) to guide you through the intricacies involved in filing returns as well as provide some ease of mind during your stay abroad. In addition, the German Finanzamt will give you tax advice at no charge. If you are interested in further information about the German tax system and can read German, visit the Finanzamt website at www.bundesfinanzministerium.de
Germany Tax Rates 2011
Last partial update, March 2011
- The German tax system has undergone a comprehensive reform in the year 2001 and later in 2008. This reform is intended, in principle, to ease the actual rate of tax for both individuals and companies.
- Taxation of an individual's income is progressive. In other words, the higher the income, the higher the rate of tax payable. In 2011 the Germany tax rates for an individual are 14% - 45%.
- Singles pay on income above EUR 250,731 (couples, on income above EUR 501,462) income tax of 45% before 5.5% solidarity tax.
In addition to regular tax, there is a municipal trade tax of 14%-17% that is imposed by the municipality.
- The standard rate of Germany corporate tax in 2011 is 15%. There is a reduced rate for part of a corporation's income.
- An additional tax has been imposed to help the merger of the two Germanys. This is "solidarity tax" which is 5.5% of the normal rate payable. The tax is levied on corporations and individuals, subject to the conditions specified in the law.
- In 2011 the effective corporate tax rate, including trade tax and solidarity tax is about 30%-33%.
- An individual is liable for tax on his income as an employee and on income as a self-employed person. An individual who meets the test of a "permanent resident" of Germany will have the tax calculated on his income in Germany and from overseas.
Germany individual income tax rates ,2011
| Tax % | Tax Base (EUR) |
| 0 | Up to 8,004 |
| 14% | 8,005-52,881 |
| 42% | 52,882-250,730 |
| 45% | 250,731 and over |
Note: The rates are before solidarity tax,all individuals,and business tax-for business income. Members of the church pay 8%-9% church tax.
Germany Deduction of Tax at Source
Taxation of Employees:
The employer is obligated to deduct tax at source from an employee and to make additional contributions to social security.
Social Security:
- An employed person - The employer and employee each make an equal payment.
- The social insurance covers pensions, unemployment and nursing insurance.
- There is an upper limit of the salary on which national insurance is payable.
- Income in excess of the limit is exempt from national insurance.
Deductions must be made from the following payments to nonresidents as follows:
- Dividend - 26.375% (including solidarity tax).
- Royalties - 15.825% (including solidarity tax).
- Interest - 0%.
Germany Value Added Tax:
- The standard value added tax rate in Germany is 19%.
- There is a reduced rate of 7% that relates mainly to food and agricultural products.
- Value added tax is imposed on assets and services in Germany as well as on imports into Germany.
- Overseas exports are exempt from value added tax.
- Value added tax reports must be submitted monthly or quarterly, depending on the annual turnover.
- There are special provisions for small businesses.
Germany Inheritance and Gifts Tax:
- A tax applies in Germany to both inheritances and gifts and the application of the taxation principles is similar in both cases.
- When either the person making the gift / the testator or the recipient of the gift / the heir is a German resident, the tax applies also to assets that are overseas.
- When neither the person making the gift / the testator or the recipient of the gift / the heir is a German resident, the tax applies only to assets that are located in Germany.
- When tax is imposed in a foreign country, the tax paid overseas will be deducted from the tax payable in Germany. For these purposes a Double Taxation Prevention Treaty has been signed with a number of countries, among them, the United States of America, Switzerland, Austria and others.
- As a general rule, recipients of gifts / inheritances are divided into three groups.
- Group 1 - a spouse, children.
- Group 2 - parents and grandchildren.
- Group 3 - all others.
- The tax rates vary according to the above groups and also depend on the value of the asset. The tax payable fluctuates between 7% and 50%.
- There are certain exemptions that depend on the degree of family kinship.
Germany Real Estate Transfer Tax:
- The tax is imposed on real estate that is located in Germany.
- The taxes are transferred to the local authority in which the property is located.
- The tax is also imposed when buying at least 95% shares of a company owning real estate.
- The rate of tax is 3.5%-5%.
Types of German tax:
- MEHRWERTSTEUER - the tax added to the price of goods and services. Known in the UK as VAT (Value Added Tax) and in the US as Sales Tax. Unlike the USA, the Mehrwertsteuer is already included in the posted prices at stores. This increased from 16% to 19% in January 2007.
- EINKOMMENSTEUER - the regular income tax. Too complex to even BEGIN to explain it here...just be aware that it is much higher than in the UK or the USA. So if your company is sending you over, make sure they apply Hypo-Tax calculations.
- SOLIDARITAETSZUSCHLAG - Solidarity tax (originally introduced to help rebuild east Germany after the reunification - but only people in west Germany paid it!). Is a part of the Einkommensteuer. Was supposed to be cancelled, it's still around - the money came in handy to the government. Now with Merkel, an East German, in power, what are the odds of its getting reduced? :-(
- KIRCHENSTEUER - Church tax - if you belong to one of the main religions, "donating" is not an option. Take 8% of your income tax due in a year, and it is ON TOP. Only consolation is that you can deduct it from your gross income in your income tax statement (Einkommensteuer). If you declared your religion when you arrived (when you went to register and get your Lohnsteuerkarte), then you have to pay. Given the, say, negative experiences some religions have had in the past in Germany, why would anyone declare their faith? Still, you can formally leave the church (austreten) - over 800 Germans do it every day. See: kirchenaustritt.de.
- RUNDFUNKGEBUEHREN - TV Tax: if you have a TV or radio in your house, you have to pay for a license for it. You can get the forms at the post office (GEZ) so the tax can be deducted automatically from your bank account. A whopping €17.03 per month!
- FAHRZEUGSTEUER - Automobile tax. It is a function of the displacement (cc's) of your engine, and the emission rating of the car. Here you can calculate how much it is: Vehicle tax calculator.
Germany personal Income tax
Germany personal income tax (Einkommenssteuer) rates are progressive up to 45%.
| Taxable income (EUR) | Tax payable (EUR) |
| Less than 8,004 | Nil |
| 8,005 to 52,881 | Progressive rates of between 15% and 42% |
| 52,882 to 250,000 | 42% |
| More than 250,000 | 45% |
The highest tax rate is 45% for taxable income of individuals that exceeds EUR 250,000 (EUR 500,000 for married couples).
Income tax is payable by German resident individuals on their worldwide income. Non-resident individuals are only required to pay tax on German-sourced income.
Individuals are deemed resident if they have a residence in or their customary place of abode is in Germany. The latter is the case if the individual has spent more than 180 consecutive days of the relevant year in Germany.
Income tax is payable on assessable income less allowable deductions. Assessable income includes business income, income from agriculture and forestry, income from self-employment, income from employment, certain capital gains, capital investment income, and rental and royalty income. Allowable deductions include personal allowances, deductions for business/professional expenses and contributions to specified (insurance) bodies.
Individual taxpayers suffer instalment payments which are withheld from their salaries by their employers. Self-employed individuals and those with non-salary income pay instalments on a quarterly basis with reference to the income realised in the previous year.
Retained profits from a trade or business, agriculture or self-employment generated in business years ending after 31 December 2007 by individually-owned firms or partnerships are taxable upon application at a reduced tax rate of 28.25%. When profits are withdrawn, the amount withdrawn is subject to a further tax charge (tax rate 25%) in the assessment year of the withdrawal but is reduced by taxes already paid on the profits distributed. Interest and dividend income is subject to a 25% flat withholding tax plus surcharge of 5.5% of the tax due only. Expenses connected with the receipt of investment income are not deductible but a lump sum of EUR 801 can be deducted. The shareholder may opt to report the interest in his income tax return if the withholding tax rate exceeds his marginal income tax rate.
If the taxpayer is married, the income of the taxpayer is combined with the income of the spouse. Then the tax on 50% of the combined income is doubled correspondingly. In addition to the personal income tax, a surcharge is levied at the rate of 5.5% of the personal income tax.
Social security contributions are withheld from employees' salaries and wages. The employer and employee each generally contribute 50% of the total social security contributions. From 1 January 2010 the deductibility of medical insurance contributions has been reformed for income tax purposes to a large extent in favour of the taxpayer.
Members of the Roman Catholic, German Protestant, Lutheran and Jewish churches have to pay church tax. The tax rate amounts to about 8% or 9% of the annual income tax liability and varies according to the district of residence. It is a deductible expense for income tax purposes.
Assets transferred by gift or inheritance are subject to tax. If either the transferor or the recipient is resident in Germany, all transferred assets are taxed wherever situated. If neither party is a German resident, the tax is limited to property located in Germany. The Federal Republic of Germany keeps tax treaties with six countries for these purposes - Austria (expired 1 January 2008), Denmark, Greece, Sweden, Switzerland and USA.
With effect from 1 January 2009, the German national Inheritance and Gift Tax Act was significantly reformed. The tax rates and exemptions vary according to the relationship between the transferor and the recipient and the value of the assets. Where children or the spouse are the beneficiaries, the rates range between 7% (where the assets have a value of EUR 52,000 or less) and 30% (where the assets have a value of more than EUR 25,565,000). In the new legislation the rates for brothers and sisters have been reduced and vary between 15% and 43%. If the transferor and the beneficiary are unrelated, the rates vary between 17% and 50% respectively. The spouse of the transferor is granted a personal allowance of EUR 500,000 and the children of the transferor are granted an allowance of EUR 400,000.