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Simple Tax Guide for Americans in Germany

Simple Tax Guide for Americans in Germany

Germany is one of the OECD countries (Organization for Economic Co-operation and Development) formed to stimulate economic progress and world trade.  At TFX we’ve been preparing U.S. taxes for Americans living in Germany for over 21 years. Our clients live all over the country - large cities like Berlin and Frankfurt as well as small villages in Bavaria.

Thousands of American citizens live in Germany, so it is important to understand the effect it has on their United States taxes. Many people are drawn to the business-friendly atmosphere of the country, with many company headquarters located there, a large US military presence, and friendly culture.

Regardless of where in Germany you live, you must understand your tax obligations in both Germany and the United States - and they each affect the other. You will end up paying some taxes in both countries.

US Taxes for Expats in Germany

US citizens, as well as permanent residents, are required to file expatriate tax returns with the US government every year regardless of where they reside. Along with the typical tax return for income, many people are also required to submit a return disclosing assets that are held in bank accounts in foreign countries by using FinCEN Form 114 (FBAR) if the value of those financial accounts and assets are more than $10,000.  You may also be required to File Form 8938 (FATCA) along with your tax return if the value of foreign financial assets is $200,000 or more.

The United States is among only a few governments that tax international income earned by their citizens, as well as permanent residents, residing overseas. There are, however, some provisions that help protect from possible double taxation. These include:

  • The Foreign Earned Income Exclusion. This exclusion allows one to exclude USD 108,700 (this amount is for 2021 taxes) in earned income from foreign sources.
  • A tax credit allowing tax on remaining income to be reduced based on the taxes paid to foreign governments.
  • An exclusion on foreign housing that allows additional exclusions from their income for some amounts paid to cover household expenses due to living abroad.
  • If you have dependents under the age of 12, you can also claim a child tax credit, officially known as the Child and Dependent Care Credit, to reduce your tax liability. Your child dependents must have a US Social Security Number (SSN) to qualify for the tax credit.

Preparing a quality tax return following proper tax planning should allow one to use these, as well as other strategies, in minimizing or possibly eliminating tax liability. Note that in most cases the filing of a tax return is required, even if taxes are not owed.

Who Qualifies as a Resident of Germany?

An expat is considered to be a resident of Germany if they have a residence in Germany or when they intend to stay longer than 6 months in a single year or any 6 consecutive months. A person can prove residency by having a residence in Germany, or by being present in Germany in a way that indicates they will stay long term.

Similarly, leaving Germany without having any ties (such as a residence, financial accounts, or another type of connection) is sufficient to cause tax residency status to cease. Even being a German national is not sufficient to establish residency for tax reasons. If a person leaves Germany, they are not considered a resident when it comes to their taxes.

Germany Tax Rate vs US

When we consider taxes in Germany Vs USA, relative to US expatriate tax rates, Germany’s tax rates are high. An expat will pay a greater amount to the German government in the beginning, but they will eventually benefit from savings on their United States expatriate taxes when they file their return with the Internal Revenue Service.

In Germany, taxable income is income from employment, after the standard deduction and any other deductions are taken. Taxation begins at EUR 9,744 (single individuals). For married couples, the filing threshold for joint returns increases to EUR 19,488. Tax rates are progressive, and are:

Germany's Income tax rates

Rate

Income (Single)

Income (Married)

0%

EUR 9,744

EUR 19,488

14%

EUR 9,744 - EUR 57,918

EUR 19,488 - EUR 115,836

42%

EUR 57,918 - EUR 274,612

EUR 115,836 - EUR 549,224

45%

EUR 274,612 & more

EUR 549,224 & more

 

US Income Tax rates

Rate

Income (Single)

Income (Married)

10%

Up to USD 9,950

Up to USD 19,900

12%

USD 9,950 - USD 40,525

USD 19,900 - USD 81,050

22%

USD 40,525 - USD 86,375

USD 81,050 - USD 172,750

24%

USD 86,375 - USD 164,925

USD 172,750 - USD 329,850

32%

USD 164,925 - USD 209,425

USD 329,850 - USD 418,850

35%

USD 209,425 - USD 523,600

USD 418,850 - USD 628,300

37%

Over USD 523,600

Over USD 628,300

 

You’ll notice that German tax rates are higher than US tax rates. More information is available from the German Finance Ministry.

Deductions from income include the EUR 1000 standard deduction. Business expenses that are unreimbursed can be itemized (with receipts) and deducted from income. Personal deductions cap at an amount of EUR 8,820. Monthly deductions are also available for allowances that are given to children, starting at a level of EUR 204 for each child (2 children) and are capped at a level of EUR 235 (4 or more). A basic deduction for children is available at EUR 4,000 for each dependent child (EUR 8,000 for married couples filing joint returns).  For tax years 2020 and 2021, employees who were working remotely are allowed to deduct 5 euros per day up to a maximum of 600 Euros per year.  Also, any contributions made to insurance schemes such as health insurance both statutory and private health insurance, long-term care insurance, unemployment insurance, and pension scheme contributions are also deductible up to certain limits.

In Germany, there are no regional taxes, although church tax is applied to members of churches. This tax rate varies and is usually around 8%-9%.

There is also a 5.5% tax on tax paid for the solidarity surcharge.

Germany - Individual - Taxes on personal income (pwc.com)

Germany Tax Brackets

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, with 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

Tax Season in Germany

The tax year in Germany matches that of the US - the calendar year of January 1 thru December 31. For obvious reasons, this makes things a bit more convenient since both German and United States taxes can be filed at the same time.

If a taxpayer has a residence in Germany, they must submit an unrestricted return. Otherwise, they will submit a restricted return, assuming their employer was not required to withhold German taxes.

When to File Taxes in Germany

Tax returns (Einkommensteuererklärung) must be filed with the local tax office before 31st of July of the following year (July 31st, 2022 for tax year 2021). If a professional prepares the return, the deadline is automatically extended to December 31st in the next year without submitting any application.  Also, in some circumstances, the due date can be further extended to February 28.

When Are German Taxes Due?

Tax payments are due 1 month following the income tax notice issued by the Ministry of Finance. Late filing penalties are 10% of taxes, and is limited to no more than EUR 25,000. A fee for paying late of 1% per month is applicable to any outstanding balance. Along with the penalty for late filing is interest assessed at ½% per month.

German Social Security

Immediately upon starting work, a person is automatically enrolled in the German version of social security. This is not applicable to those people working within Germany, but for companies located in a different country.

There is an agreement between Germany and the United States regarding which country receives social security taxes when a person is working within Germany. If a person is assigned to work within Germany for 5 years or fewer, by a United States company, they will pay taxes into the United States Social Security system. If their assignment is more than 5 years, they pay into the German system of social security. A person whose employer is non-US will pay their taxes to Germany.

Expat Benefits in Germany

Even though the tax rates are very high in Germany, there are advantages that come with being employed there.  Germany’s social security system is one of such benefits where employee will be contributing around 20% and employer matches the other 20%.  People working in Germany have to make these compulsory social security contributions covering the following areas:

 
  • Health Insurance (Krankenversicherung)

  • Pension Insurance (Rentenversicherung)

  • Long-term care insurance (Pflegeversicherung)

  • Unemployment insurance (Arbeitlosenversicherung)

German Tax Laws for Foreigners - Does Germany Tax Foreign Income?

There is no difference in the taxation in Germany for Foreigners and German citizens.  For everyone including expats who are considered German residents for tax purposes, all income including domestic and worldwide is considered to be taxable. There are tax treaties between Germany and many other countries which stipulate where the taxes must be paid. Anyone earning income from outside Germany will want to review any treaties between that country and Germany, and most likely will want to speak with an expert.  Nonresidents have limited tax liability in Germany and are subject to tax only on certain types of income from German sources.  Germany tax rate for foreigners is also the same progressive rate starting at 14% and upto  45% for those with high earnings

US Germany Tax Treaty

A treaty between Germany and the United States helps clarify situations concerning which country any taxes must be paid to. In general, most situations are based on residency status - is the person a German resident or a US resident? Where is the taxpayer working? In which country was income paid? Where is the taxpayer’s employer based - in Germany or the US? Each of these questions are factored into the decision about where to pay taxes.

Germany’s Income Tax

Individual Income tax in Germany consist of income tax, a solidarity surcharge and where applicable, church tax.  The maximum income tax rate is 45 percent plus there is solidarity surcharge of 5.5 percent of the income tax.  For 2021 and later years, only high-income earners (about 10%) are required to pay solidarity surcharge and it will be eliminated for 90% taxpayers.  In addition to these taxes, church tax is also applicable for German residents who are registered Catholics, Protestants, or Jewish.  The tax amount is based on individual’s income and the state in which the person lives in.  Few states charge 8% and others charge 9%.

American Expats in Germany - Other German Taxes 

There are taxes on capital gains and other investments in Germany, at a 25% rate. Losses from investments, as well as asset sales, are eligible for deduction from income earned from other assets and investment sales. The tax system is arranged so these taxes are deducted automatically. As an example, German banks will deduct taxes automatically from income earned on accounts such as savings accounts. For any income from outside Germany, it is not deducted automatically, but taxes must still be paid to German tax agencies.

There is not a wealth tax in Germany, but inheritance tax varies from 7% to 50% based on the value of the inheritance.

Real estate capital gains are only taxed if the property was not occupied by the owner and was held for under 10 years. Rental income taxes are due to the country where the rental is located.

Because of Germany’s high tax rates, it is especially vital to understand filing requirements, tax rates, and your tax obligations so that you can plan. This will let you better plan to minimize taxes due to both Germany and the US.

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 

How to File Tax Return in Germany

Taxpayers can submit the annual German tax return on paper or online using the software (called ELSTER (ELektronische STeuerERklärung = electronic tax declaration)) designed by the Federal Central Tax Office.  Salaried employees will be subject to income tax withholding and they need to submit the tax return in case there is an expectation of tax refund or they receive income from sources other than employment. 

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.