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Tax guide for Americans in Germany

Tax guide for Americans in Germany

With its robust economy, rich cultural heritage, and high quality of life, Germany has become a popular destination for expatriates from around the world.

Whether you're drawn to the bustling streets of Berlin, the industrial hubs of Frankfurt, or the scenic beauty of Bavaria, living in Germany offers a unique blend of experiences.

However, with the excitement of living in a new country comes the responsibility of understanding and complying with its tax regulations. This article takes an in-depth look at the German tax system and offers insights tailored for expatriates.

From understanding tax brackets and benefits to navigating local versus federal taxes, we provide a comprehensive guide to ensure you're well-equipped to meet your tax obligations and make the most of the financial opportunities available to you in Germany.

Table of contents

  1. Who can be considered a resident of Germany?
  2. Types of taxation in Germany
  3. Self-employment & Business taxes for expats
  4. Tax rate in Germany compared to the US
  5. Tax brackets in Germany
  6. Social security in Germany
  7. Deductions and credits for expats in Germany
  8. Tax advantages for expats
  9. Filing income tax returns in Germany
  10. Penalties for late or incorrect filing
  11. Tax treaty between the US and Germany
  12. US taxes for expats in Germany
  13. US tax forms for expats

Who can be considered a resident of Germany?

Under German tax law, you are considered a resident of Germany if you meet any of the following criteria:

  • You have your permanent home in Germany.
  • You stay in Germany for at least 183 days in a tax year.
  • You have your center of vital interests in Germany.

If you are considered a resident of Germany, you will be taxed on your worldwide income. However, you may be able to claim a foreign-earned income exclusion or deduction to reduce your US tax liability.

Types of taxation in Germany

In addition to the income tax, there are a number of other taxes that are levied in Germany, including:

1.Capital gains tax

In Germany, capital gains, known as "Kapitalerträge" are generally considered regular income and are subject to the standard income tax rates. However, there are specific provisions for capital gains derived from the sale of private assets.

If assets like real estate or shares are held for more than ten years, the gains from their sale are tax-free. A flat tax rate, known as "Abgeltungsteuer," of 25% is applied to the gains for assets held for a shorter duration. An allowance is available, and amounts below this threshold are exempt from the capital gains tax.

2.Inheritance and gift tax

The inheritance and gift tax, or "Erbschaftsteuer und Schenkungsteuer," is levied on assets transferred due to death or as a gift. The tax rate and allowances vary depending on the relationship between the donor and the recipient.

For instance, transfers between spouses or registered partners have a higher allowance than between distant relatives or unrelated individuals. The tax rates range from 7% to 50%, with assets transferred to close relatives generally facing lower rates.

3. Church tax

The church tax, "Kirchensteuer" is a unique feature of the German tax system. It's levied on members of certain religious congregations, primarily the Roman Catholic, Protestant, and Jewish communities. The tax rate is typically 8% or 9% of the individual's income tax, depending on the federal state.

While the state collects the church tax, the revenue goes directly to the respective religious communities.

Individuals can opt out of the church tax by officially leaving the religious congregation, but this decision might affect participation in religious ceremonies and services.

4.Dog tax

In Germany, owning a dog comes with a specific tax called the "Hundesteuer" This tax is levied by local municipalities and is intended to cover the public costs associated with dogs, such as waste disposal and potential damages.

The amount varies depending on the municipality, the number of dogs owned, and sometimes the breed. Some cities may have higher rates for breeds considered "dangerous."

It's essential for dog owners to register their pets with the local authorities to ensure compliance.

5.Estate tax

Germany's estate tax, often intertwined with the inheritance tax, is levied on the net value of an individual's estate after their death.

The rates and allowances are similar to those of the inheritance tax, with the amount of tax depending on the value of the estate and the relationship between the deceased and the beneficiary.

6.Real estate transfer tax

The real estate transfer tax, or "Grunderwerbsteuer" is imposed when real estate property is transferred in Germany. The tax rate varies between federal states, typically ranging from 3.5% to 6.5% of the property's purchase price.

Both buyers and sellers need to be aware of this tax, as it can significantly impact the overall cost of a real estate transaction.

Self-employment & Business taxes for expats

For expatriates venturing into self-employment or establishing a business in Germany, understanding the tax implications is paramount.

Germany's tax system for businesses and the self-employed is comprehensive, ensuring that all economic activities contribute to the nation's fiscal health. Here's a breakdown of the key tax considerations for self-employed expats and businesses:

VAT registration for self-employed expats

Value Added Tax (VAT), or "Umsatzsteuer" is a crucial aspect for self-employed individuals and businesses in Germany. If you're self-employed and your annual turnover exceeds a certain threshold, you are required to register for VAT with the local tax office ("Finanzamt").

Once registered, you'll need to charge VAT on your invoices and periodically (monthly, quarterly, or annually) file VAT returns.

The standard VAT rate is 19%, but a reduced rate of 7% applies to certain goods and services. It's essential to ensure that invoices are correctly issued with the appropriate VAT rate and that VAT collected from customers is set aside to be remitted to the tax authorities.

Business tax rates

In Germany, businesses are subject to various taxes based on their legal form and operations:

  • Corporate Income Tax ("Körperschaftsteuer"): Applicable to corporations like GmbH (limited liability company) and AG (stock corporation). The rate is a flat 15%, with an additional solidarity surcharge of 5.5% on the tax amount.
  • Trade Tax ("Gewerbesteuer"): This is a municipal tax levied on business operations. The rate varies depending on the municipality, typically ranging between 14% and 17%. It's worth noting that sole proprietors and partnerships can offset part of this tax against their personal income tax.
  • Income Tax ("Einkommensteuer"): Sole proprietors and individual partners in a partnership are subject to personal income tax on their business profits. The rates are progressive, ranging from 0% to 45%, depending on the total income.
  • Solidarity Surcharge: As with individual taxpayers, businesses are also subject to the 5.5% solidarity surcharge on their corporate income tax liability.

Tax rate in Germany compared to the US

The tax rates in Germany are generally higher than those in the US. For example, the top marginal income tax rate in Germany is 45%, compared to 37% in the US. However, there are a number of deductions and credits available in Germany that can reduce the overall tax burden.

Income tax rates in Germany

The income tax system in Germany is also progressive, with the following tax brackets:

Taxable income range for single taxpayers (EUR) Taxable income range for married taxpayers (EUR) Tax rate (%)
0 - 10,908 0 - 21,816 0
10,908 - 62,809 21,816 - 125,618 14 to 42*
62,809 - 277,825 125,618 - 555,650 42
277,825 and above 555,650 and above 45

*Geometrically progressive rates start at 14% and rise to 42%.

The figures are adjusted on a regular basis.

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Tax brackets in Germany

There are 6 tax brackets in Germany. The tax bracket you fall in will depend on your marital status.

  1. Those single or separated, but not falling into either categories 2 or 3
  2. Single and separated, from a child, entitling them to a child’s allowance
  3. Married, or widowed employees who are within the first year of a spouse’s death
  4. Married employees both receiving income
  5. Married persons who would normally fall into category 4, but whose spouse is in tax class 3
  6. Employees who receive income from other employment on one or more different tax cards

Social security in Germany

Germany's social security system is renowned for its comprehensive coverage, ensuring that residents, including expatriates, have access to essential services and benefits.

The system is funded through contributions from both employees and employers, with self-employed individuals also making contributions based on their income.

The German social security system encompasses several branches, including health insurance, pension insurance, unemployment insurance, accident insurance, and long-term care insurance.

Benefits for expats in Germany

Expatriates residing and working in Germany are generally integrated into the German social security system and are entitled to a range of benefits:

  1. Health Insurance ("Krankenversicherung"): Expats are either part of the statutory public health insurance or can opt for private health insurance, depending on their income and employment status. The public system covers a wide range of medical services, including doctor visits, hospital stays, and prescription medications.
  2. Pension Insurance ("Rentenversicherung"): Contributions made to the pension insurance fund ensure that individuals receive a pension upon reaching retirement age. The amount of pension received depends on the number of years of contributions and the amount contributed.
  3. Unemployment Insurance ("Arbeitslosenversicherung"): If an expat loses their job, they may be eligible for unemployment benefits, provided they have contributed to the unemployment insurance for a specified period.
  4. Accident Insurance ("Unfallversicherung"): This covers accidents that occur at work or on the way to and from work. It provides medical treatment and, in severe cases, rehabilitation or disability benefits.
  5. Long-term Care Insurance ("Pflegeversicherung"): In the event of severe illness or disability requiring long-term care, this insurance provides benefits to cover care-related costs.
  6. Integration Benefits: For expats new to Germany, there are integration courses and language classes to help them assimilate into German society and the workforce.

Deductions and credits for expats in Germany

In addition to the standard deductions and credits that are available to all taxpayers, there are a number of special deductions and credits that are available to expats living in Germany. These include:

  • Foreign Earned Income Exclusion (FEIE)
  • Foreign Tax Credit
  • Foreign Housing Exclusion or Deduction

Foreign Earned Income Exclusion (FEIE)

The FEIE allows you to exclude up to $112,000 of your foreign-earned income from your US taxable income in 2023. This means that if you earn less than $112,000 in foreign-earned income, you will not have to pay any US taxes on that income.

To qualify for the FEIE, you must meet the following requirements:

  • You must be a US citizen or resident alien.
  • You must be a bona fide resident of a foreign country for at least 330 full days during the tax year.
  • Your tax home must be in a foreign country.

Foreign tax credit

If you've paid or accrued taxes to a foreign government, the Foreign Tax Credit can offer relief. This credit provides a dollar-for-dollar reduction in your US tax liability for foreign taxes paid on the same income.

It's designed to ensure that you aren't taxed twice on the same income. You can claim the Foreign Tax Credit by either electing to take the credit on Form 1116 or by deducting the foreign taxes on Schedule A of your US tax return.

However, the credit method often provides a more significant tax benefit than the deduction method.


Foreign Housing Exclusion or Deduction

Expats often face higher living costs abroad, especially in major cities. Recognizing this, the US tax code provides the Foreign Housing Exclusion or Deduction.

This rule permits eligible expatriates to either remove or reduce a segment of their overseas housing costs from the income they're taxed on. The permissible deduction is determined by the FEIE and can fluctuate based on the place of residence, with cities having higher living expenses offering more significant exclusions.

The housing exclusion applies to employed individuals, while the housing deduction is for the self-employed. Eligible housing expenses include rent, utilities (excluding telephone charges), real and personal property insurance, nonrefundable leasing fees, furniture rental, and residential parking.

If you choose to exclude your housing expenses, you will not be able to claim a deduction for those expenses. If you choose to deduct your housing expenses, you will be subject to certain limitations.

Tax advantages for expats

Germany, recognizing the economic and cultural value brought by expatriates, offers several tax advantages to make the country more attractive for foreign professionals and investors.

These advantages aim to alleviate the potential double taxation burden and provide incentives for expats to work, invest, and settle in Germany.

Special tax breaks or incentives

  1. Double Household Deduction: Expats who maintain a residence in their home country and another in Germany due to employment can deduct certain costs related to the double household. This includes travel expenses between the two residences and additional living expenses in Germany.
  2. Moving Expenses: Costs related to relocating to Germany for work purposes can be deducted. This includes transportation of belongings, travel costs, and certain initial accommodation expenses.
  3. Tax-Free Allowance: Germany offers a basic tax-free allowance, ensuring that individuals with low incomes are not taxed. For expats, this can provide significant relief, especially in the initial stages of their stay.
  4. Child Benefits: Expats with children may be eligible for child benefits ("Kindergeld"), a monthly payment for each child, regardless of the parent's income.

Filing income tax returns in Germany

Filing the tax return is compulsory for self-employed people and freelancers.

Others are required to submit a German income tax return if any of the following conditions apply:

  • You have received more than one source of income.
  • You have received income from abroad.
  • You are married and have opted for either tax class 3 or 5.
  • You have received more than 410 euros’ worth of salary replacement income (such as child benefit, sickness benefit, maternity pay or unemployment benefit).
  • You are divorced and married again in the same year.
  • You have received extraordinary income, such as severance payments.
  • You wish to receive a refund by applying any of the tax deductions.
  • The tax office sends a letter requesting you to file a tax return.

When to file tax returns in Germany

The deadline for filing income tax returns in Germany depends on whether you're preparing the return yourself or with the assistance of a tax advisor:

  • Self-prepared Returns: If you're filing without the help of a tax advisor, the deadline is May 31st of the year following the tax year.
  • Returns Prepared by a Tax Advisor: If you're using a tax advisor's services, the deadline extends to December 31st of the year following the tax year. In certain situations, with justified reasons, further extensions can be granted.

How to file a tax return in Germany

  • Electronic Filing: The German tax authorities encourage electronic filing through the ELSTER (Elektronische Steuererklärung) system. This online platform allows taxpayers to submit their returns, view tax assessments, and communicate with the tax office.
  • Paper Filing: While electronic filing is preferred, taxpayers can still opt for traditional paper filing. The necessary forms can be obtained from the local tax office or downloaded online.
  • Supporting Documents: Depending on the nature of your income and deductions, various supporting documents may be required, such as income statements, proof of tax paid abroad, or receipts for deductible expenses.

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What tax forms must Americans living in Germany file?

Americans living in Germany must navigate both German and US tax systems. In addition to their US tax obligations, they must file:

Einkommensteuererklärung: The primary income tax return form in Germany, detailing worldwide income.

  • Anlage N: For income from non-self-employed work.
  • Anlage V: For income from rented and leased properties.
  • Anlage KAP: For capital income, such as interest and dividends.

Germany tax forms for expats

Expatriates in Germany may need to file additional forms based on their specific circumstances:

  • Anlage AUS: For foreign income and expenses.
  • Anlage S: For income from self-employment.
  • Anlage R: For pension income.
  • Anlage WA-ESt: If claiming relief under a double taxation treaty.

Penalties for late or incorrect filing

The German tax authorities, known as the "Finanzamt" are stringent when it comes to compliance. Late or incorrect filings can lead to penalties, which can be financial or in the form of other sanctions.

  • Late Filing Penalties: If you miss the deadline for filing your tax return, the Finanzamt may impose a late filing fee. This fee is calculated based on the amount of tax due and the duration of the delay. The longer you wait to file, the higher the penalty can become.
  • Interest on Late Payments: In addition to late filing penalties, interest is charged on taxes that are paid after the due date. This interest accrues from the day after the payment deadline until the date of payment.
  • Estimation of Taxable Income: If you fail to submit your tax return, the tax authorities may estimate your taxable income based on available data or previous returns. This estimation might not be in your favor and could result in a higher tax liability.
  • Criminal Proceedings: In severe cases, especially where tax evasion is suspected, criminal proceedings can be initiated.
  • This could lead to substantial fines or even imprisonment.

How to rectify missed filings

  • Voluntary Disclosure: Germany offers a voluntary disclosure program, allowing taxpayers to come forward and declare previously unreported income. If done correctly, this can lead to immunity from prosecution and reduced penalties. However, there are specific conditions to be met, and the disclosure must be complete.
  • Consult a Tax Advisor: If you realize you've made an error or missed a filing, it's advisable to consult with a tax advisor or "Steuerberater." They can guide you on the best course of action, whether it's submitting an amended return or navigating the voluntary disclosure process.
  • Prompt Payment: If you've received a notice of late payment penalties or interest, it's essential to settle the amount as soon as possible. Prompt payment can prevent further accrual of interest and demonstrate good faith to the tax authorities.
  • Open Communication with the Finanzamt: If you're facing genuine difficulties, such as financial hardship, that prevent you from meeting your tax obligations, it's beneficial to communicate this to the Finanzamt. They may offer payment plans or other solutions to assist you.

Tax treaty between the US and Germany

Germany and the US have a bilateral tax treaty in place to prevent double taxation and foster economic cooperation between the two countries. The treaty covers various income types, ensuring that individuals and businesses aren't taxed on the same income in both countries.

Tax treaties benefit

Key benefits for expats include:

  • Residency Determination: The treaties provide criteria to determine in which country an individual is a resident for tax purposes, ensuring they aren't taxed as residents in both countries.
  • Tax Credits: If an expat pays tax on a certain income in Germany and is also liable for tax on the same income in their home country, they can often claim a tax credit in their home country for the tax paid in Germany.
  • Reduced Withholding Rates: The treaties often reduce the withholding tax rates on dividends, interest, and royalties paid between the treaty countries. This can be particularly beneficial for expats with investments or business interests.
  • Pensions and Social Security: Many treaties cover social security payments and pensions, ensuring that these aren't taxed in both countries and that expats can benefit from social security systems in both places.

Totalization agreement between the US and Germany

Apart from the tax treaty, Germany and the US have a totalization agreement that coordinates the social security systems of both countries.

This agreement is particularly beneficial for expatriates who split their careers between the two countries.
Key aspects include:

  • Avoiding Double Contributions: Without the agreement, workers from one country working in the other might be required to pay social security contributions to both countries. The agreement ensures that they only pay contributions to one system at a time.
  • Benefit Computation: For those who have worked in both countries but do not meet the minimum contribution period for a pension in one of them, the totalization agreement allows for the aggregation of contribution periods. This ensures that workers can access benefits based on their combined work history in both countries.

US taxes for expats in Germany

US citizens and green card holders living in Germany are required to file US federal tax returns, even if they are also paying taxes in Germany.

Expats should also be aware of the FBAR (Foreign Bank Account Report) if they have foreign financial accounts that exceed certain thresholds.

Also read - FBAR Filing Guide

US tax forms for expats

The main US tax forms that expats need to file include:

  • Form 1040: This is the main tax form that all US taxpayers must file. Expats living in Germany will need to file Form 1040NR, which is a special form for non-resident aliens.
  • Form 2555: This form allows you to claim the foreign earned income exclusion. This exclusion allows you to exclude up to $112,000 of your foreign-earned income from your US taxable income.
  • Form 1116: This form allows you to claim the foreign tax credit. This credit allows you to credit the taxes you paid to Germany against your US tax liability.
  • Form 8938: This form is required if you have more than $200,000 in foreign assets.

In addition to these main forms, there are a number of other forms that may be required, depending on your individual circumstances.

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Living expenses for US expatriates in Germany

One of the most important considerations for US expatriates in Germany, aside from understanding tax obligations, is to be aware of the living expenses in Germany.

While this page doesn't go into the specifics of the cost of living, it's important to note that these costs can vary significantly depending on the city and lifestyle.

Large cities such as Berlin, Munich and Frankfurt generally have a higher cost of living than smaller towns. Typical living costs in Germany include rent, utilities, transportation, food, health insurance and entertainment.

Therefore, it's important for expatriates to budget wisely and stay informed about the cost of living in their chosen German city.

FAQ

1. Germany - US FATCA Treaty overview

The Protocol signed at Berlin on June 1, 2006 amended Article 26 of the Tax Treaty between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes. The amendment authorizes exchange of information for tax purposes, including on an automatic basis. Such automated exchange of information was enacted through the Foreign Account Tax Compliance Act (FATCA), a piece of legislation introduced by the United States government in 2010, to help counter US tax evasion.


In Germany, the principles of FATCA have been brought into the local law. This means that German financial institutions need to provide information on US accounts to the German tax authorities (Bundeszentralamt für Steuern). Further, it becomes a subject to the Intergovernmental Automatic Exchange of information.
 

2. When did German banks start sending data on the U.S. account holders?

The main requirements of US and Germany Intergovernmental Agreement came into effect on 31 May of 2013.

German banks were required to extract account balances at 30 June 2014 and undertake checks depending on the value of the account. Higher value accounts (balances over $1m) were reviewed by 30 June 2015 and lower value accounts ($50k - $1m for individuals and $250k - $1m for entities) will need to be reviewed by 30 June 2016. 
 

3. What searches does a German bank have to do to comply with US FATCA?

Financial institution must search their data to identify financial accounts held by US Specified Persons, or by foreign entities in which US taxpayers hold a substantial ownership interest.

In order to achieve this, financial institution need to search their data looking for any one of seven indications (indicia) that an account holder may be a US person. These indicia are:
1. US citizen (check for US passport or Green Card). 
2. US residential address
3. Place of birth in the US
4. US telephone number
5. Standing instructions to send funds to a US bank account
6. Power of attorney (PoA) or third party authority in favour of a person with a US address
7. Use of a c/o or hold mail address

 

4. Which types of German financial accounts reported on FBAR / FATCA ?
  • Individual bank accounts such as savings accounts, checking accounts, and time deposits.
  • Retirement accounts
  • Brokerage accounts, commodity futures or options accounts,
  • Insurance policies and annuity contracts with a cash value 
  • Business accounts where U.S person has a greater than 50 percent interest in the entity 
5. Which types of German financial assets are not required to be reported on FBAR / FATCA ?

Even though FATCA will provide relief in reporting scope to many German retirement plans and certain collective investment vehicles that are considered “deemed compliant”, the FATCA rules applying to individuals were not relaxed. Form 8938 specifically requires reporting by U.S. taxpayers who participate in foreign pension plans.