Thousands of American expatriates live in Germany, but how does living there affect their expat taxes? Germany has long been seen as a business-friendly country, since it is the location of several international headquarters. When you include the large US military presence, thousands of American expatriates live in Munich, Berlin, Essen, and other German cities.
As a US citizen in Germany, understanding your German tax obligations without forgetting your US expat taxes is important – and so is understating how the German tax system will affect them. In all likelihood, you will pay both US expat taxes and German taxes.
US Taxation of Expatriate Americans
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. US expats have more filing requirements than a typical US citizen does. You could be required to file an informational return on your assets held in foreign bank accounts. While the US is one of the few governments that taxes the international income of its citizens and permanent residents, it does have special provisions to help protect expats from double taxation, including:
- The Foreign Earned Income Exclusion, which allows you to decrease your taxable income on 2019 US expat taxes by the first $105,900 earned as a result of your labor ($103,900 for 2018) while a resident of a foreign country;
- A foreign tax credit that could lower your US expat taxes on your remaining income by certain amounts paid to a foreign government; and
- The Foreign Housing Exclusion, which 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 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.
Who is Considered a German Resident?
You are considered a resident of Germany if you 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 long term. 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.
Likewise, departure from Germany without any ties (a primary residence, financial or other connections) is enough to end 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.
German 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 saving on your US expat taxes when it comes time to file with the IRS.
In Germany, taxable income is employment income after the allowable and standard deductions have been taken. The threshold for taxation is currently EUR 9,169 if you’re single; in the event that you’re married, the joint filing threshold is EUR 18,338. The tax rate is progressive, based on income, starting at 14% on income of greater than EUR 9,170 and reaching the first cap of 42% at EUR 55,961. This rate will then be applied until the second threshold, EUR 265,327, is reached. Income surpassing EUR 265,327 is taxed at 45%.
Tax rates from the German Finance Ministry for the 2018 tax year are as follows:
|Tax Percent||Tax Base (EUR)|
|0||Up to 9,169|
|14-42%||9,170 – 55,961|
|42%||55,962 – 265,327|
|45%||265,328 and Over|
As you can see, these rates are higher than those for US expat taxes.
Deductions from your income will include a standard deduction of EUR 1,000. If you have unreimbursed business expenses (which need to be proven with receipts), you can itemize the deductions from your income. Personal deductions (obligatory future care) are capped at EUR 8,820. Monthly deductions for allowances paid to children start at EUR 194 per child (two children) and cap at EUR 225 (four or more children). There is also a basic child deduction of EUR 4,000 per dependent child for a single parent. That is increased to EUR 7,248 if a married couple is filing jointly.
There are no regional taxes; however, a church tax is applied to registered members of an official church. The church tax varies but is typically 8-9% of your income tax.
German taxpayers are also subject to a solidarity surcharge of 5.5% of taxes paid, making the actual highest rate of income tax 50.5%.
German Tax Due Date
Germany’s tax year is the same as the United States: January 1 through December 31. This timeline should make filing easier and may reduce the amount of time and effort put into filing taxes for both countries.
Taxes are to be filed by May 31 of the year following the tax year. There is an automatic extension to December 31 if the return is prepared by a tax professional. Further, an additional extension is available that can be filed for February 28 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 month 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
The US-Germany Social Security Agreement describes to which country social security is payable when 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 German Social Security. You are automatically entered into the German Social Security program as soon as your employment begins in Germany. This does not apply for those who are working in Germany for a company located outside of Germany.
Is Foreign Income Taxed in Germany?
For anyone who is considered a tax resident 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 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.
US-Germany 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 you a resident of the US or Germany? Where do you work? 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.
Investment 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.
An inheritance tax is calculated using graduated rates from 7% to 50%. However, no wealth tax is assessed in Germany.
Capital gains taxes on real estate are levied only if the property 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
Since Germany is a country with a relatively high tax rate, being aware of the filing requirements, obligations, and taxation levels is important in order to plan appropriately. This will also allow you to better prepare for your US expat taxes when it comes time to pay your home country.
Need Help With US Expat Taxes in Germany?
Updated February 14, 2020.