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Simple Tax Guide for Americans in Germany

Simple Tax Guide for Americans in Germany

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 Expat Taxes - 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 which are held in bank accounts in foreign countries by using FinCEN Form 114 (FBAR).

The United States is among only a few governments who 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 101,300 (this amount is for 2016 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.

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 when they intend to stay longer than 6 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.

Tax Rates for Germany

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 8,004 (single individuals). For married couples, the filing threshold for joint returns increases to EUR 16,008. Tax rates are progressive, and are:

Rate   Income
0% On EUR 8,130
14% EUR 8,131 - EUR 52,881
42% EUR 52,882 - EUR 250,730
45% EUR 250,731 & more

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

Deductions from income include the EUR 920 standard deduction. Business expenses that are unreimbursed can be itemized (with receipts) and deducted from income. Personal deductions cap at an amount of EUR 6,591. Monthly deductions are also available for allowances that are given to children, starting at a level of EUR 184 for each child (2 children) and are capped at a level of EUR 215 (4 or more). A basic deduction for children is available at EUR 2,184 for each dependent child (EUR 4,368 for married couples filing joint returns).

In Germany there are not 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.

When Are German Taxes Due?

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.

Tax returns must be filed before the 31st of May. If a professional prepares the return, the deadline is automatically extended to the 31st of December. A further extension is available to February 28 in the next year, but requires an application in writing.

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.

Does Germany Tax Foreign Income?

For everyone considered German residents for tax purposes, all income 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.

US-German 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.

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 is 25%.

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.

How to Report German Income on our Tax Questionnaire

1. How do I report income on the tax questionnaire?

For income you earned while being employed:

 

The primary source of information is Anlage N. If you had employee income from sources outside of Germany you will also need Anlage AUS to add numbers from the respective fields.

 

Report amount from line 6 (Bruttoarbeitslohn) on line Gross wages/salary earned with this employer question in the Main | Earned Income section.

 

German tax declaration.jpg



 

For income earned from self-employment

 

Income from self-employment  is a turnover of your unincorporated business. You will need German forms Anlage S or Anlage G.  Report it on the Gross Income from Self-employment tab of the Self-employment questionnaire (Supplemental income tab). Each type of income is reported as gross amount, before any deductions allowed in Germany (i.e. before contributions to German Public Retirement System).

 

Severance pay (Abfindung)


If you received severance pay as a compensation for termination of employment, add gross amount as additional wages.

2. How do I report taxes paid on the tax questionnaire

Similarly to income, tax also has to be reported separately for each type of income on which tax was paid.  Add the amounts printed on line 7 Income Tax (Lohnsteuer)   line 8 (Solidaritätszuschlag). Enter results on line Foreign income tax paid during the calendar year on wages of the Earned Income section of Tax Questionnaire.

If there was additional tax payment during the calendar year (i.e., Bundeszentralamt für Steuern issued tax bill for tax underpaid in the prior year), add that amount to the amount of tax withheld during the filing year.

 

Taxes on unearned income may be withheld by the payor (i.e.,bank withheld income from dividends) or you may owe tax upon completion of tax assessment form. Report each type of tax paid during the filing  year in the respective section, even if it applied to income received in prior years.

 

Do not combine and report separately property tax in the Deductions section and stamp duty in the sale of home section..

3. How do I report my deductions?

We will take specific deductions allowed for German residents by the US/German treaty (i.e., we can deduct contributions made to employer pension scheme). You will report contributions to employer pension separately from the gross income and we will take this deduction if this improves your tax position (in some cases you may benefit from not taking this deduction now).

 

Further, section “Deductions” of TQ  offers you questions related to various additional deductions Examples of such deductions are mortgage interest, alimony payments, investment advisor fees. Similarly to personal allowances in Germany, the U.S. tax system also applies a concept of “Standard deduction”:  $6,300 per single person and $12,600 for married couple for 2015 tax year. For most German residents filing U.S. tax return standard deduction option is more tax efficient than “itemized deductions” - grossing up individual deductions.

4. How do I report pension contributions?

Report employer contributions and your own contributions to employer pension scheme on the tab Earned Income.

5. How do I report pension payouts?

Report payouts from foreign pension of all types: Social Security, employer pension, Widow's Pension in section Pensions.

6. As I live in Germany my taxes are taken out of my salary automatically but then I also have a deduction taken out for the German Social Security system. Do I add these together for my income tax or is it just the tax paid and no National Insurance payment?

Social Security payment is not deductible from your salary. Likewise, you do not “deduct” income tax - we need to report gross salary and then take foreign tax credit for income tax (not for the Social Security tax).

 

Other example of non-deductible taxes are Church tax and VAT.

7. I receive Kindergeld --- how do I report this?

This does not need to be reported - it is not treated as income.

German Pension and Social Security Systems

1. Social Security in Germany (Rentenversicherung)

Contributions to the German Public Retirement System withheld from your pay-check or made on self-employment income are not deductible from the U.S. taxable income and do not qualify for the foreign earned income credit.

 

You can check your record of the German Public Retirement System account here: http://www.deutsche-rentenversicherung.de/Allgemein/de/Navigation/5_Services/02_online_dienste/online_dienste_node.html

2. US - Germany Social Security Totalization Agreement

Overview


An agreement between the United States and the Federal Republic of Germany improves Social Security protection for people who work or have worked in both countries.  It helps people who, without the agreement, would not be eligible for retirement, disability or survivors benefits under the Social Security system of one or both countries.  It also helps many people who would otherwise have to pay Social Security taxes to both countries on the same earnings.

 

The provisions of the agreement eliminate double Social Security taxation and permit dual residents to use their work in both countries to qualify for benefits.

 

If you are self-employed


Contributions to German Public Retirement System make you exempt from contributions to the U.S. Social Security system that otherwise would be required in the U.S. on self-employment income.

 

How it impacts those who want to earn US Social Security credits


If you have Social Security credits in both the United States and Germany, you may be eligible for benefits from one or both countries.  If you meet all the basic requirements under one country's system, you will get a regular benefit from that country.  If you do not have enough work credits under the U.S. system to qualify for regular benefits, you may be able to qualify for a partial benefit from the United States based on both U.S. and German credits.  To be eligible to have your German credits counted, you must have earned at least six credits under the U.S. system.  To be eligible to your U.S. credits counted towards German benefits you must have a minimum period of coverage in Germany totaling 18 months.

 

Although the agreement allows the Social Security Administration to qualify for U.S. retirement, disability or survivor benefits, the agreement doesn’t cover Medicare benefits.
 

3. Taxation of Social Security Benefits
  1. U.S. Social Security Benefits


    1. U.S. Social Security benefits received by US citizens and green card holders residing in Germany are exempt from tax in the United States and are taxable only in Germany.

  2.  

     

    German State Pension 

    1. German State Pension and other payments received under the German Public Retirement system legislation by US citizens and green card holders residing in Germany are taxable in both countries. 

    2.  

       

      Foreign tax credit can be applied to eliminate double taxation.
       
4. Contributions to Employer Pension Schemes

When a U.S. citizen/green card holder is a participant in a employer pension scheme established in Germany:

 

a) Contributions paid by or on behalf of that individual to the pension scheme may be excludable in computing his U.S. taxable income 

 

and

 

b) Any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer is not treated as part of the employee’s taxable income

 

However - exclusion of contributions to pension scheme is not mandatory. You may report those contributions on our Tax Questionnaire Earned Income Tab (Question - Did your employer contribute to your pension plan (such as Pillar II, Superannuation, KiwiSaver, Employer Matching Contribution, etc)? to have it added to  your annual taxable income.  

 

Considering the high tax rate paid in Germany on earned income, added employer contributions may still leave you tax free in the U.S. Your benefit: the added amount will be considered previously taxed - which will reduce the taxable portion of pension payments in the future.
 

5. Taxation of German Pension Benefits

Pensions and other similar remunerations paid to US citizen/green card holder residing in Germany are taxable in both countries. 

 

However - you can eliminate the burden of double taxation. Taxes paid in Germany on pension income are applied as a foreign tax credit against tax owed on the same income in the U.S.
 

6. Tie-Breaker Rule to Apply Treaty Benefits

U.S. green card holders residing in Germany may elect to apply what is known as the tie-breaker rule of the US/Germany Tax Treaty and be deemed a resident only of the State (ie country) with which their personal and economic relations are closer (Germany).

 

Under such election, the individual would file form 1040NR and report only income derived from U.S. sourced. The requirement to provide full disclosure of foreign bank accounts remains and tax on income from U.S. sources will be higher than tax on the same income when applied to U.S. residents filing form 1040.
 

German Financial Accounts and FBAR/FATCA

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.