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U.S. Federal Income Tax Obligations For U.S. Expatriates Living/ Working in Germany

The Basics – Germany

The Federal Republic of Germany is located in Central and Western Europe and lies between the Baltic and North seas to the north, and the Alps to the south.  It borders Denmark to the north, Poland and the Czech Republic to the east, Austria and Switzerland to the south, and France, Luxembourg, Belgium and the Netherlands to the west.

After the end of World War II in Europe and a period of Allied occupation, two new German states were founded: the Federal Republic of Germany, generally known as West Germany, and the German Democratic Republic, East Germany.  

The Federal Republic of Germany was a founding member of the European Economic Community and the European Union, while the German Democratic Republic was a communist Eastern Bloc state and member of the Warsaw Pact. After the fall of communism, German reunification saw the former East German states join the Federal Republic of Germany on 3 October 1990.

With over 83 million inhabitants of its 16 constituent states Baden-Württemberg, Bavaria, Berlin, Brandenburg, Bremen, Hamburg, Hesse, Lower Saxony, Mecklenburg-Vorpommern, North Rhine-Westphalia, Rhineland-Palatinate, Saarland, Saxony, Saxony-Anhalt, Schleswig-Holstein and Thuringia.

Germany comprises a total area of 137,847 sq miles is the 62nd largest country in the world by area, has a population of 83,166,711 people and a GDP of 4.454 trillion U.S. dollars.  The Germany’s currency is the is the Euro, the Germany’s time zone is +1 UTC, Germany’s country telephone dialing code is +49, it’s internet TLD is “.de” and it operates on a 230 volt electrical grid.

There are thousands of American expatriates living in Germany, but how does living there affect their U.S. 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.

The U.S. and the Germany share common Western democratic concepts dating back to WWII and the support that the U.S. gave Germany under the Marshall Plan, helping to rid Germany of Nazism and Communism, including famous visits and speeches by President(s) Kennedy and Reagan.  This makes Germany a popular destination for Americans to reside and work. 

Knowing your obligations as a U.S. Expat are important. The Internal Revenue Code’s (IRC) rules are, however, quite complex, and while this is a simplified, broad overview to familiarize you with your filing obligations and how to avoid double taxation, you should consult a Certified Public Accountant  (CPA) expert in U.S. Expat income taxation to learn more.  U.S. Expat income taxes are a highly complex niche area of taxation that most CPA’s are not aware of.

U.S. Tax Obligations on U.S. Expats Living in the Germany

The U.S. imposes the same obligations on its citizens and resident aliens living abroad in Germany to file and pay U.S. federal income taxes, as it does on its citizens and residents living and working in the U.S. 

Filing deadlines and Extensions Living/ Working in the Germany

If you are required to file a U.S. individual income tax return Form 1040, you must file by April 15, however there is an automatic two-month extension until June 15 if you reside in the Germany On April 15 and meet certain requirements.  There are other extensions beyond June 15 that U.S Expats can utilize, including the filing a Form 4868- for an automatic six-month extension of time to file until October 15, and an additional and little known about white paper IRS discretionary extension to December 15 if you reside in Germany, but, again, you have to meet the IRS requirements to use this extensions.

However, no matter how many extensions are utilized, any income taxes owed are still due by April 15, as the extensions are only an extension of time to file not to pay your U.S. income taxes! 

Avoiding Double Taxation

If you meet the annual income tax filing thresholds referred to above, you are technically required to file and report worldwide income for U.S. income tax purposes on the same income you are also obligated to pay taxes on in Germany  The good news is that, if you pay income taxes to Germany on income you earned there, the U.S. IRC has provisions in place to let you avoid double income taxation, using both:

The Exclusions – FEIE

As always, there are certain tests you must meet to be eligible to claim these special exclusions and credits.

If you meet these IRC requirements, the FEIE is claimed on Form 2555, and allows you to exclude “Foreign Earned Income” (FEI) from U.S. Federal income taxes.  FEI is essentially wage or self-employment income that you earn while living and residing in Germany/ outside the U.S. 

To qualify to take the FEIE you have to:

  • Meet the “Tax Home Test”, (THT) and
  • Meet either the:
    • “Bona fide Residence Test” (BFR), or the
    • “Physical Presence Test” (PPT).

Generally, this means that on a facts and circumstance basis you actually must live and/or work in Germany and meet certain specific requirements.  If you do qualify for the FEIE, it is not unlimited.  The IRS sets annually indexed amounts as to how much you can exclude.

The Exclusions – HE and HD

As a U.S. Expat living in Germany, you may also qualify for the:

  • “Housing Exclusion” (HE) if employed or
  • “Housing Deduction” (HD) if self-employed.

Both Housing mechanisms referred to above allow U.S. Expats to exclude additional FEI from their U.S. Federal income taxation in reference to actual, qualified, foreign, housing expenses paid for by themselves or by their employers either directly or by reimbursement in Germany. 

Qualified foreign housing expenses can include, but are not limited to such items such as German:

  • Rent,
  • The fair market value of employer provided housing,
  • Furniture rental, and
  • Temporary living expenses.
  • Real estate/ property taxes
  • Etc…

However, to take either the HE or the HD you must first be qualified to take the FEIE, and the IRS sets annual limits- a base or housing Norm/ or Deductible and a Cap- on either of the Housing Exclusions or Deductions, which are determined in reference to the FEIE itself. 

The Form 114 FBAR

Not to forget or marginalize the fact that all U.S. persons must consider their obligation annually to file Form 114 Report of Foreign Bank and Financial Accounts (FBAR), which is specifically referenced on Schedule B – Interest and Dividends- that accompanies Form 1040, the fact that if you are required to file both the FBAR and FFA Forms as a U.S. Expat living and/ or working in Germany the amounts on both forms  must sync and carry a mind boggling non-willful violation penalty of $10,000 per account per annum

The Bottom Line

Because Germany sets income taxes on income at much higher rates than the U.S., if the U.S. income tax compliance is done correctly, in general assuming no U.S. source income- no U.S. passive income and no U.S. workdays-  you  should never have to pay any additional U.S. Federal Income taxes on income you earned in Germany  

As you can see, however, the rules are complex, and it is easy to get overburdened if you do not hire the correct CPA firm U.S. Expat specialists. 

At Protax, our primary goal and objective is to analyze the interplay of the FEIE, HD, HE and FTC to find the optimum strategy to limit the world-wide taxes you pay.  While of course at the same time making sure that you are in full U.S. tax compliance. 

Protax is the world’s leading U.S. individual international tax firm, specializing in the delivery of world class professional services to U.S. Expats.  For more information, fill out our contact form to speak to one of our expert tax consultants.

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