A US expat’s guide to residency and taxes in Germany
As a US expat moving to Germany, it’s helpful to get an understanding of the country’s tax laws and how it taxes both residents and non-residents. David McKeegan from Greenback Expat Tax Services explains what you need to know about residency and taxes for US expats in Germany.
While tax regulations in Germany are not meant to be overly complicated, they can pose a challenge to new arrivals who may be unfamiliar with how they work. In this article, we'll explain what you need to know about residency and taxes in Germany so you can feel comfortable that you won’t get into trouble with the authorities!
How are residents and non-residents taxed in Germany?
In Germany, residents are taxed based on worldwide income, while non-residents are only taxed on income from German sources.
So, if you have a job in Germany and own property in the US, the way you are taxed will depend on where you live. If you live in Germany, your entire income will be taxed, whereas if you live in the US, only the money you earn in Germany (i.e. from your job) will be taxable in Germany.
The United States taxes citizens on worldwide income
Things are a little different when it comes to US taxes. The United States (and Eritrea) are the only two countries that tax citizens worldwide, regardless of where they live.
So for US citizens in Germany, it's essential to understand the rules when it comes to being considered a resident or non-resident so you can understand how your taxes will be filed.
Residency status is determined by many factors, including:
- Absences from Germany during the year.
- Length of time lived in Germany (the longer you live here and have ties here, the more likely it is that you will be considered a resident).
- Purposeful actions made during the year, such as renting an apartment or buying property (these actions can indicate intent to make Germany your permanent home).
Residency status for tax purposes
Understanding residency status is key to understanding taxes in Germany (and elsewhere). It's important to know whether you're considered a resident or non-resident because this changes how you are taxed.
Generally, to be considered a resident for tax purposes in Germany - and thus pay taxes on earnings earned here - you need only spend 183 days out of any 12 consecutive months in Germany.
However, if requested by the competent authority responsible for issuing residence permits (eBAMF), you may also require evidence that proves that other criteria apply to you.
Resident for tax purposes
"Resident for tax purposes" is a legal term that describes someone who lives in Germany and has a permanent home here. Generally this applies to anyone who spends more than 183 days in Germany within one calendar year.
For example: if you move from the US on June 1 and register yourself in your new home in Munich by July 1, then the German government would likely consider you a "resident for tax purposes" since they know where they can find your permanent address.
If you are considered a resident for tax purposes, you must pay direct taxes like income taxes, and you may be required to submit an annual tax return. You will be taxed on your worldwide income (although you might receive deductions for taxes already paid abroad, for example). You will also be required to pay certain social security contributions.
Non-resident for tax purposes
If you are a non-resident for tax purposes, the rules are different. You will be subject to income taxes on any income earned in Germany (like wages or interest).
Non-residents of Germany might file an income tax return if their income was not subject to withholding tax. If a non-resident's income is subject to withholding tax -such as dependent work or investment income - they cannot file an income tax return. However, non-residents who are citizens of EU / EEA member states can file a German income tax return. Non-residents are subject to individual income tax rates, but the basic tax-free allowance of 9.408 euros does not apply to any income other than employment income.
Hopefully, we've helped you understand the residency and tax implications of living in Germany.
Got more questions about taxes and residency? Contact Greenback Expat Tax Services for more advice on your US tax obligations! If you'd like to discuss your specific tax situation or need advice don't hesitate to sign up for a consultation or create an account to get started.