What Americans should know about reporting income taxes in Germany
Find out how you should file your income taxes while living outside of the US and what information you need to provide to the IRS with this helpful guide from TFX.
If you're an American expat living in Germany, you're probably aware that you have to file a tax return with both the German government and the US government. But that’s easier said than done.
In case you’re unsure of what’s expected of you, this article covers everything you need to know about reporting your income taxes as an American expat in Germany, including which forms to fill out and when they’re due. Read on to get up-to-date with the latest tax laws and ensure you report your income correctly.
Should American expats file US tax returns even if they live in Germany?
Regardless of where they live, US citizens and permanent residents are obligated to file expatriate tax returns with the US government every year. Many people are required to file a return disclosing assets kept in overseas bank accounts, using FinCEN Form 114, in addition to their regular tax return for income (FBAR).
The United States is one of the few countries that taxes international income received by citizens and permanent residents living abroad. There are, however, some safeguards in place to prevent double taxation, including:
- The Foreign Earned Income Exclusion allows you to exclude 101.300 dollars (in 2016) in earned income from foreign sources.
- Tax credits allow you to reduce your US tax bill based on taxes you have paid to foreign governments.
- The Foreign Housing Exclusion allows you to deduct some amounts paid for household expenses incurred abroad from your US tax bill.
Preparing a quality tax return in conjunction with good tax planning should enable you to employ these and other tactics to reduce or eliminate your US tax liability. Even if you don't owe any taxes, you must file a tax return in most situations.
When am I considered a German tax resident?
When an expat plans to stay in Germany for more than six months, they are considered a resident. You can prove residency by having a permanent address in Germany or by being present in Germany in a way that implies you intend to stay for an extended period of time.
Leaving Germany without any ties (such as a dwelling, financial accounts, or any sort of relationship) will also result in the loss of tax residency status. Being a German citizen isn't enough to establish residency for tax purposes. When it comes to taxes, a person who leaves Germany is not considered a resident.
What are the tax rates in Germany?
Germany's tax rates are high when compared to those in the United States. However, these higher taxes are at least partially offset by the money you stand to save on your US expatriate taxes when submitting a return to the IRS.
Taxable income in Germany is earned income after the standard deduction and any other deductions have been made. Taxes are due on any income over 9.744 euros and the rates increase progressively. Married couples have the option to file jointly (for instance if one partner earns more than the other) to reduce their overall tax bill.
The progressive tax rates in Germany are as follows:
|0%||Up to 9.984 euros|
|14 - 42%||9.985 - 58.596 euros|
|42%||58.597 - 277.825 euros|
|45%||277.826 euros and more|
As in the US, you can reduce your overall tax liability in Germany by making use of deductions. For instance, all workers get a standard deduction of 1.000 euros. Beyond this, unreimbursed business expenses can be deducted if they are itemized with receipts. You can deduct, for example, the cost of commuting and work equipment.
Parents can also make use of tax-free allowances for their children to reduce their taxable income. In 2021 this was 2.730 euros per year per parent, plus a further 1.464 euros per parent for childcare and education costs.
Further personal deductible expenses include alimony payments, charitable contributions, social security contributions and any mortgage interest paid on rental properties.
When are German taxes due?
In Germany, the tax year corresponds to the calendar year, running from January 1 to December 31. For obvious reasons, this simplifies matters by allowing both German and American taxes to be filed at the same time.
In Germany, tax returns must be submitted by July 31 of the year following the tax year. The deadline is immediately extended to the end of February the second year following the tax year if the return is prepared by a certified tax professional.
Tax payments are due one month after the Ministry of Finance issues your income tax notice. Late filing penalties are 10 percent of the amount owed, up to a maximum of 25.000 euros. Any outstanding debt is subject to a late payment penalty of 1% per month. In addition to the penalty for late submission, interest of 12% per month is charged.
What is the agreement between Germany and the United States regarding social security taxes?
When a person works in Germany, there is an agreement between Germany and the United States as to which nation collects social security taxes (contributions). If a person is contracted to work in Germany for less than five years by a US corporation, they will be required to pay taxes to the US Social Security system. If their assignment lasts longer than five years, they must pay into the German social security system.
A person who works for a non-US company will pay social security contributions in Germany.
Does the German government tax foreign income?
All money earned anywhere in the world is taxable for anyone considered a German resident for tax purposes. Tax treaties exist between Germany and a number of other countries that specify where taxes must be paid. Anyone earning money outside of Germany should research any treaties that exist between the two countries and, if necessary, consult an expert.
What is the US-German Tax Treaty?
A pact between Germany and the United States serves to clarify situations in which taxes must be paid to each country. The majority of instances are determined by the person's residency status: are they a German or a US citizen? Where does the taxpayer go to work? Which country did the money originate in? Is the taxpayer's employer located in Germany or the United States? Each of these considerations is taken into account when deciding where to pay taxes.
What is the Streamlined Procedure – IRS Amnesty Program?
The IRS recently broadened the conditions of a program that permits overseas Americans to file late tax returns in the United States. This scheme was first launched in 2012, and it allowed lapsed taxpayers living overseas to avoid penalties and costs by bringing their accounts up to date.
Changes made in 2014 improved an already popular program, resulting in over 48.000 taxpayers using it. Most crucially, the program has broadened qualifying criteria and abolished all late filing and late payment penalties. The tool can also be used to file amended forms in order to obtain retroactive relief on qualifying overseas pension plans that are eligible for tax deferral.
If you have any questions about your taxes as an American expat in Germany, your best recourse is to consult a tax expert. TFX has been preparing US tax returns for over 25 years. Let the experts take care of your taxes.