Simple Tax Guide for Americans Living 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.
We have a dedicated German phone line for our clients from Germany: 0800 723 5198
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.
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:
|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.
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.