7 German financial decisions that cause unexpected tax issues for US expats
Living in Germany often means building a new financial life, from opening local bank accounts to investing, contributing to a pension, buying property or starting a business.
For US expats, however, some perfectly normal financial decisions in Germany can create unexpected US tax and reporting requirements.
Universal Tax Professionals regularly works with US citizens living in Germany who discover that everyday financial decisions can have consequences for their US taxes. Here are seven situations worth understanding.
1. Investing in German or European funds
Many German and European mutual funds and ETFs can be classified as Passive Foreign Investment Companies (PFICs) under US tax rules.
Owning them may require Form 8621, potentially for each PFIC held, and can result in complicated US tax calculations.
Before investing, it is worth making sure you understand the US tax rules for PFICs and Form 8621.
2. Contributing to a German pension
German pensions do not always receive the same US tax treatment that they receive in Germany.
The US-Germany tax treaty can affect certain pension arrangements, while some foreign pension assets may also need to be considered for Form 8938 reporting.
The treatment depends on the type of pension, so US expats should not assume a German retirement plan works like a US 401(k) or IRA.
3. Opening bank accounts in Germany
German bank and investment accounts can create US reporting obligations even if they don't generate additional tax.
If the combined maximum value of your foreign financial accounts exceeds 10.000 US dollars at any point during the year, you generally need to file an FBAR (FinCEN Form 114).
Depending on your foreign assets and filing status, you may also need to file Form 8938 under FATCA.
4. Becoming self-employed as an expat
Americans who freelance or become self-employed in Germany generally still report their business income on their US tax return, commonly using Schedule C.
Self-employment can also involve Schedule SE and US Social Security taxes. However, the US-Germany Social Security Agreement may help prevent double Social Security coverage in qualifying situations.
5. Starting or investing in a German company
Forming a GmbH or investing in a German company can significantly increase US reporting requirements.
Depending on the entity and ownership structure, you may need Form 5471, Form 8865 or Form 8858. Controlled Foreign Corporation rules, including GILTI and Subpart F, may also apply.
Understanding foreign business reporting requirements before establishing a company can help prevent unexpected compliance problems.
6. Buying or renting out property
Buying a home in Germany does not necessarily create an immediate US tax liability, but renting or selling it can.
German rental income generally needs to be reported in the US, commonly on Schedule E. US rules for depreciation and calculating gains can also differ from German rules.
You may be able to claim eligible German taxes through the Foreign Tax Credit using Form 1116.
7. Assuming German taxes replace US taxes
Paying German income tax does not automatically eliminate your US filing obligations.
US citizens living in Germany may be able to reduce double taxation using the Foreign Tax Credit on Form 1116 or, when eligible, the Foreign Earned Income Exclusion on Form 2555.
Getting US tax help in Germany
As your financial life in Germany grows, your US taxes can become more complicated. Investments, pensions, property and businesses can all introduce reporting requirements that are easy to overlook.
Universal Tax Professionals helps Americans in Germany with annual US tax returns, FBARs, foreign investments, businesses and complex international reporting.