U.S. Expat Taxes Explained: Filing Taxes as an American in Germany
There are thousands of American expatriates living in Germany, but how does living there affect their US expat taxes? Germany has long been seen as a business country, with several international headquarters located in the country. When you include the large military presence, you have thousands of American expatriates living in Munich, Berlin, Essen and other Germany cities.
Wherever you live in Germany, it is important to understand your German tax obligations, while not forgetting your US expat taxes — and how the German tax system will affect them. You will pay both US expat taxes and Germany taxes.
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US Expat Taxes in Germany
If you are a citizen or permanent resident of the United States, then you are obligated to file US expat taxes with the federal government each year, regardless of the country in which you reside.
In addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with Foreign Bank and Other Account Reporting (FBAR) Form 114, in addition to Form 8938 Statement of Specified Foreign Financial Assets.
While the US is one of the few governments that tax the international income of their citizens and permanent residents who reside overseas, it does have special provisions to help protect them from double taxation including:
- The foreign earned income exclusion allows you to decrease your taxable income on US expat taxes by the first $108,700 for 2021 ($107,600 for 2020) earned as a result of your labors while a resident of a foreign country.
- A foreign tax credit that could allow lower your US expat taxes on your remaining income by certain amounts paid to a foreign government, and
- A foreign housing exclusion that allows an additional exclusion of income for certain amounts paid for household expenses that occur due to living overseas.
With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize or even eliminate your US expat taxes. Please do note that even if you do not believe that you owe any US income taxes you will, most likely, still be required to file a return. For more information, see US Expat Taxes Explained: An Overview of Our New Series.
Who is a German Resident?
Individuals are considered residents of Germany if they arrive with the intention of staying for a period longer than six months. Residency can be proven by establishing a residence within the country, or having a presence in the country that indicates that you will be staying for a long term.
Likewise, departure from Germany without any ties (a primary residence, financial or other connections) is enough to cease tax resident status. Even German nationality is not enough to establish tax residency — if you leave the country, you are not a resident for tax purposes.
Germany Income Tax Rates
Germany has a relatively high tax rate when compared with the tax rates applied on US expat taxes. While you pay more to German tax authorities up front, the benefit is savings on your US expat taxes when it comes time to file with the IRS.
The taxable income in Germany is employment income, after the allowable and standard have been taken. The threshold for taxation is current EUR 8,004 for a single individual; in the event that an individual is married, the joint filing threshold is EUR 16,008. The tax rate is progressive based on income, while reaching the first cap of 42% at EUR 52,881. This rate will then be applied until the second threshold, EUR 250,731, is reached. Income surpassing EUR 250,730 is taxed at 47.5%.
Tax rates from The German Finance Ministry are as follows:
|Taxable Income (EUR)||Tax Rate (%)|
|52,882 – 250,730||42%|
|250,731 and above||47.5%|
As you can see, these are higher rates than on US expat taxes.
Deductions from your income will include a standard deduction of EUR 920. If you have unreimbursed business expenses (which need to be proven with receipts), you can itemize the deductions from your income. There are personal deductions (obligatory future care) that cap at EUR 6,591. There are monthly deductions for allowances paid to children, which start at EUR 184 per child (two children) and cap at EUR 215 (four or more children). There is also a basic child deduction of EUR 2,184 per dependent child for a single parent. That is doubled to EUR 4,368 if a married couple is filing jointly.
There are no regional taxes, but there is a church tax applied to registered members of an official church. The church tax varies, but is typically 8-9% of the individual’s income tax.
Taxpayers are also subject to a solidarity surcharge of 5.5% of taxes paid, making the actual highest rate of income tax 47.5%.
Germany Tax Due Date
Germany’s tax year is the same as the United States, January 1st through the 31st of December. This will be more convenient for administrative reasons when it comes time to file both your German and US expat tax returns.
You will be required to file an unrestricted tax return if you have a residence or abode in Germany. Otherwise, you will need to file a restricted tax return if your employer had no obligation to withhold your German taxes.
Taxes are to be filed by May 31st of the year following the tax year. There is an automatic extension to December 31st if the return is prepared by a tax professional. There is an additional extension that can be filed for February 28th of the subsequent year, but it does require a written application.
Payment will be due one month after the German Ministry of Finance has issued the German income tax assessment notice. Penalties for filing late are limited to 10% of the assessed German taxes, but cannot exceed EUR 25,000. There is a late fee of 1% of the taxes due for each moth the taxes have an outstanding balance. In addition to the late filing penalty, interest is assessed on the taxes due at the rate of .5% each month.
US – Germany Social Security Agreement
An individual is automatically entered into the German Social Security program as soon as employment begins in Germany. This does not apply for those who are working in Germany for a company located outside of Germany.
The US–Germany Social Security Agreement describes which country social security is payable to when an individual is working in Germany. If you are assigned, by a US company, to work in Germany for five years or less, you will pay into US Social Security. If the assignment is for more than five years, you pay into German Social Security. If you are working for a non-US employer in Germany, you will pay into the German Social Security system.
Is foreign income taxed in Germany?
For all individuals who are considered tax residents of Germany, worldwide income is considered taxable. Germany does have tax treaties with a number of countries which determine where taxes are to be paid. If you are earning income outside of the Germany in a third foreign country, you will need to review the tax treaty between Germany and the third country, or talk to a tax expert.
Germany – US Tax Treaty
The US-Germany Tax Treaty is helpful in situations where it is unclear to which country taxes should be paid. Generally speaking, most tax matters are resolved based on the resident status of the individual: Are they resident in the US or Germany? Where are they working? Where was the income paid? Which country is the employer from? All of these factors will go into consideration when deciding where taxes should be paid.
Taxes in Germany
Germany does have an investment and capital gains tax, which is a flat rate of 25%. Losses on investments and sale of assets can be deducted from the income earned on other investments or assets. The system is set up so that the taxation is deducted at the source. For example, if you have a German savings account, the German bank will deduct the taxes payable from the income you have earned on your investment account. If the income is coming from outside of Germany, it will not automatically be deducted, but taxes are still due to the German tax authorities.
There is an inheritance tax of 25%, but no wealth tax.
Capital gains taxes on real estate are levied only if it was not self-occupied and held for less than 10 years. In Germany, rental income is to be taxed by the country in which the rental income is located.
Saving on US Expat Taxes
With Germany being a region with a relatively high tax rate, it is important to be aware of the filing requirements, obligations and taxation levels in order to plan appropriately. This will also allow you to better prepare for your US expat taxes when it comes time to pay up to your home country.