Are you a US citizen living in Germany? It’s important to understand the US tax liabilities for Americans living abroad. While you are enjoying your expat life in Germany, don’t forget to file your US taxes!
In this article we will cover the following topics:
- US expat taxes for Americans living in Germany,
- Double taxation Germany-USA and how to avoid it,
- Who is considered as a German resident,
- Germany taxes for US citizens, including Income tax for foreigners
US Expat Taxes: Filing US Tax Returns From Germany
First of all, you need to determine if you are required to file a US tax return. It doesn’t matter where you live in the world as the US government taxes their citizens regardless of their residence. Is your annual income above the filing requirement of USD 10,400? Well, then you are required to file taxes with the IRS.
But the good news is filing taxes doesn’t necessarily mean that you will need to pay them! Actually, most of Americans abroad don’t owe any taxes. And this is due to many provisions that help to protect from double taxation.
Are you still not sure if you are a U.S. person for tax purposes? Or required to file U.S. expat taxes? Then check out the full requirements in our FAQ.
Tax Tip 1: There are many legal ways to save money on your US expat tax return. You may have heard about main ones, such as Foreign Earned Income Exclusion, Foreign Tax Credit or Exclusion on Foreign Housing. You can read more about them here.
How To Prevent Double Taxation In Germany/US
An American abroad has a number of choices in order to prevent double taxation in Germany and the USA. Let’s elaborate more on your options:
The Foreign Earned Income Exclusion allows you to decrease your taxable income from foreign sources. For example, for the tax year 2017 you can exclude the first $102,100 of foreign earned income. The FEIE has a number of requirements to be used on the tax return, check them out here.
The Foreign Tax Credit lowers your US tax obligation as it allows to reduce taxes on remaining income based on the taxes you paid in a foreign country.
The Foreign Housing Exclusion gives you an opportunity to have additional income exclusion for certain amounts you paid for household expenses overseas.
The United States and Germany also have a tax treaty, which helps to avoid tax misunderstandings, such as:
- Which country must any taxes be paid to?
- Most of the situations are based on residency status – are you the US or a German resident?
- In which country did you get your income?
- Where is your employer based – in Germany or the US?
Tax Tip 2: Consult a US tax professional before making a decision which exclusion to use or a credit to claim. There is no one-size-fits-all kind of solution and tax expert will help you take advantage of your tax situation. If you want advice with U.S. expat taxes for Americans living in Germany, you can book a free consultation call with us.
What About German Taxes For US Citizens?
Before we skip to the topic of German taxes for US citizens, we need to understand who qualifies as a resident of Germany. If you are an expat and you intend to stay longer than 6 months there, you will be a resident. You can prove your status by having a residence in Germany. Or you will need to be present in the country in a way that shows you will stay there long term.
Tax Tip 3: Do you want to cease your tax residency status? The answer is simple: leave Germany without having any ties is sufficient to cause it. By no ties, we mean no primary residence, financial accounts, or other types of connection.
Tax Tip 4: Are you a dual US-German citizen? Even being a German national is not sufficient to establish a residency for tax reasons. For example, if one leaves the country, they won’t be considered a resident for tax purposes.
Germany is famous for its’ high tax rates. It’s relatively high compared to US tax rates. A US expat will pay a greater amount to the German government in the beginning. However, this way they save on US tax return when filing with the IRS as an American expat residing in Germany.
Taxable income in Germany is an income from employment, after all the deductions. For individuals, the taxation begins at EUR 8,820 (single individuals). If you are married, your threshold for joint returns raises to EUR 17,640. Germany has a progressive tax rate system based on the income.
Tax Deadlines In Germany
Germany and the US have the same tax year from January 1st through December 31st. This timeline helps American expats to make the process of filing taxes easier.
You have to file your taxes by May 31st of the year following the tax year. In cases when tax professional is preparing your taxes, you receive an automatic extension to December 31st.
If you need an extra time, you can submit a written application to have another extension option until February 28th of the subsequent year.
If a US expat owes taxes to the German government, you need to pay due a month after the German Ministry of Finance issues the income tax assessment notice. There are penalties for late filing and they are limited to 10% of your assessed German taxes. However, they cannot exceed EUR 25,000. Then there is a late fee of 1% per month and it’s applicable to any outstanding balance. And lastly, you will have to pay interest assessed on late taxes owed at the rate of 0,5% each month. Learn more here.
German Tax On Foreign Income And Other Taxes
Everyone who is considered to be tax resident of Germany will pay taxes on their worldwide income. Germany has numerous tax treaties with different countries that determine where taxes are to be paid. For example, if you are earning income outside of Germany, you should review the tax treaty between Germany and that respective country. Or seek a professional advice from a tax expert to get them to sort out your tax situation.
Germany also has a variety of other taxes, which will help US expats there to maximize the saving and minimize tax burden. A few of them are the following:
- Investment and Capital Gains Tax
- Real estate capital gains
- Inheritance tax
Investment and Capital Gains Tax has a flat rate of 25%. You can deduct losses on investment and the sale of assets from the income earned on either of them. The tax system is set up in a way to automatically deduct these taxes. While there is no wealth tax in Germany, they have an inheritance tax at 25%. And last one, Capital Gains Tax on Real Estate is levied only if the real estate wasn’t self-occupied and held for less than 10 years. Rental income is only taxed by the country in which the rental is located.
What If I Never Filed US Expat Taxes As A US Citizen Living In Germany?
Don’t panic, this case is a lot more common than you might think. If you are behind your US taxes, there is an official IRS tax amnesty program. It is called Streamlined Foreign Offshore Procedures. You can take advantage of it if you qualify based on the following requirements:
- Non-residency requirement: You must not have a US abode meaning you have lived 330 days in at least one of the last three tax years outside of the United States
- Non-compliance requirement: You have failed to file one or more tax returns and/or haven’t reported income from a foreign financial asset (FBAR, FinCEN form 114)
- Non-willful conduct: You failed to comply with U.S. tax returns unintentionally and weren’t aware of tax obligations to file and pay taxes, disclose your foreign financial assets, income etc.
Do you need a help with US expat taxes as a US Citizen living in Germany? Contact Expatriate Tax Advisor Olivier Wagner.
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