As a US expat, do you understand your tax impact when living abroad? The United States taxes its citizens based on citizenship and not residency. It means that you will have to take care of both German tax and US tax if you live abroad in Germany. In this article, you will find information about your tax obligations in both Germany and the US.
This is a guest article written by Marc J. Strohl, CPA, the founder and managing director of Protax Consulting Services, which specializes in expat tax services.
US Citizens Should Consider Taxes When Living Abroad in Germany
Germany is increasingly becoming a favored destination for Americans looking for more attractive career prospects in an upcoming economy. High-grade education at affordable costs is yet another factor that inspires people to move across the pond to Deutschland. The presence of several international business headquarters and a significant US military presence add to the list of reasons. Lots of US citizens take up residence in cities such as Essen, Berlin, Frankfurt, and Munich, among others.
If you’re considering moving abroad to Germany, take the time to gather the necessary information about your tax obligations as a US expat. This factor is critically important since you’re expected to pay taxes both in the US and your new host country. Your tax consultant can direct you best on the regulations applicable to your particular situation. Here are some of the important facts to keep in mind.
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US Citizens and Residents Must File Taxes with the IRS Each Year
If you’re a citizen or you’re a Green Card holder with permanent U.S. residency status, you’re expected to file taxes with the IRS. This is true irrespective of the location where you currently live. Even if you’re paying taxes abroad in Germany as an expat, you must file returns in the US also. At the same time, US law has several exclusions that help you avoid paying double taxes on the income that you earn.
You can take advantage of allowances like:
- Foreign Earned Income Exclusion (FEIE) – As long as you’re earning income from foreign sources, you can deduct this amount from the limit set by the IRS. For the year 2024, expats are permitted to deduct a total of up to $126,500 from their earned income. You’ll pay taxes on the balance remaining and avail of the Foreign Earned Income Exclusion. Since the exclusion can change each year, you might want to check with your tax consultant for the latest regulations.
- Foreign Tax Credit – You can claim a credit on your US tax equivalent to the amount you’ve paid in German taxes abroad by way of the Foreign Tax Credit.
- Foreign Housing Exclusion – The IRS permits you to deduct the living expenses that you incur while residing in Germany under the Foreign Housing Exclusion. There is a specified limit to this credit and only individuals who are self-employed or working as freelancers are eligible for this exclusion. To benefit from this option, you’ll complete and submit Form 2555.
Understanding Your Resident Status in Germany
Germany considers you a resident, eligible for taxation, if you’re living in the country for more than six months. You’ll prove residency by remaining in the country for this period or by establishing a permanent home. However, if you don’t have a primary residence or any other financial ties, you can end your tax residency simply by leaving the country. In other words, once you leave, you’re no longer a resident for taxation purposes. This rule also applies to German nationals. Do keep in mind that short trips out of the country such as, say, a long weekend away are disregarded.
US Citizens Abroad are Required to File a Limited or Unlimited Tax Return
If you’re opting to live in Germany as a permanent resident, you become eligible for “unlimited tax liability.” Accordingly, you’ll pay taxes on the worldwide income you earn. On the other hand, if you’re not a permanent resident, you’ll have “limited tax liability.” There are a couple of exceptions for this rule, though. For instance:
- If 90% or more of your total worldwide income within a particular calendar year is eligible for taxation under German law, you’ll have an unlimited tax liability. This rule applies to non-residents also.
- If your income from sources outside Germany comes to less than €11,604 for the 2024 calendar year, you’ll have an unlimited tax liability. Again, this figure changes from year to year, so you’ll have to check for the updated regulations when you file your taxes. People with different countries of residence may find that this limit is lower for them.
Income Tax Rates are Typically Higher in Germany as Compared to the US
Although the income tax rates in Germany are comparatively higher than those in the US, this factor has its benefits for US citizens living abroad. You’ll pay more taxes abroad to the German government, but you can also claim a significant credit when filing US expatriate taxes. This occurred by way of a Foreign Tax Credit.
German taxation laws have tax thresholds. For instance, €11,604 was a recent cutoff for an individual citizen (in 2024). But, if you’re filing joint taxes with a spouse, this figure is fixed at €23,208. You’ll also pay a progressive percentage of your income. This rate is currently fixed at 14% to 42% for annual incomes between €11,604 and €66,761. Once you reach and cross the €277,826 cap, you’ll pay 45% taxes.
Germany levies a Solidarity surcharge of 5.5% on tax payments of €18,130 and above. This charge was first introduced in the year 1991 to collect funds for the costs of German unification. Starting in the year 2021, this fee is less likely to apply to you. Only the top 10% of income-earning individuals will have to continue to pay this tax.
Read also:
- Tax Return in Germany – Guide for Expats
- 11 Best Tax Return Software Germany – Suitable for Anyone
- Church Tax in Germany – How to Stop Paying It?
You’re Allowed Certain Deductions in Germany
German authorities allow you to deduct certain allowances from your income before calculating the taxable sum. You can claim deductions for business and personal expenses. For instance, if you have business traveling expenses that your company will not reimburse, you can submit the receipts and get deductions from your income tax.
Personal deductions, including mandatory future care, are limited to €11,604 for the year 2024. Parents have also an additional deduction of €9,312. For a single parent with dependent children, there is a further deduction of €4,260, and €240 more for each additional child.
Read also: Maintenance payments (Unterhaltszahlungen) – How to deduct in your German tax return?
Fiscal Year in Germany for Taxation Purposes
The tax year in both Germany and the US is the same as the calendar year, starting on January 1st and ending on December 31st. This factor makes it easy for you to coordinate your tax returns in both countries with a minimum of time and effort. You’ll file taxes for a particular year in the following year before the typical due date of July 31st. For example, 2018 taxes would be due by July 31st, 2019.
If you hire a professional tax consultant to help with your taxes, you receive an automatic extension to December 31st. In unusual circumstances, if you absolutely cannot complete the filing procedures, you can put in a written application and get the due date postponed again. This may extend your deadline as far as February 28th of the next year.
Important: For 2023 tax return, the tax return deadline has been extended. You can submit your 2023 tax return until 31st Aug 2024, or until 31st May 2025 (with a tax advisor).
Missing the Deadline for Filing Taxes Can Earn You Fines
If you’re eligible for paying taxes, you’ll receive an income tax assessment notice from the German Ministry of Finance. On receipt of this notice, you’re expected to cover your dues within a 30-day period. If you fall behind, you’ll incur late filing penalties of up to 10% of the assessed German taxes. However, this fine cannot exceed €25,000. For each month that you carry an outstanding balance on your taxes, you’ll pay a late fee of 0.25%. And, that’s not all. You’ll also owe interest on the late taxes that remain unpaid. The interest rates stand at 0.5% per month. It pays to be punctual.
Enrolling in the German Social Security Program
When you start working in Germany, you get enrolled in the German Social Security program. You’re eligible for this program only if the company you’re working for is based in Germany. The US-Germany Social Security Agreement determines how social security will be paid by American ex-pats living and working in Germany. If you’re working on an assignment in Germany in the employ of an American company for five years or less, you’ll continue paying US social security. However, if you’re hired to work abroad at an assignment for a longer than five-year term and the hiring company is non-US, you’re eligible to pay German social security tax.
Paying Taxes on Foreign Income in Germany
If you’re a German resident liable to pay taxes in the country, you must expect that you’ll pay taxes on income earned anywhere across the world. Germany has tax treaties with various global nations accordingly, which allows residents to avoid paying double. As an individual residing abroad in Germany, you’ll work under the regulations laid down by the Germany-U.S. Income Tax Treaty, signed in 1990. It’s also called the Convention Between The United States Of America And The Federal Republic Of Germany For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income And Capital And To Certain Other Taxes. There’s a lot of information to consider, so check with an expert tax consultant who can help you stay compliant with the laws.
Calculating taxes typically depends on factors such as:
- Do you qualify as a resident of Germany? Or, of the US?
- Where do you primarily conduct your professional activities?
- Where do you receive your earnings?
- Are you paid by a business registered in the US or in Germany?
Additional taxes Payable by Residents in Germany
Aside from income tax, you’ll pay additional taxes as a US citizen living abroad in Germany. Here’s a quick overview:
Inheritance Tax
Germany levies an Inheritance Tax on any property bequeathed to you. These tax rates may range from 7% to 50% with the exact percentage depending on your relationship with the deceased. The size of your share of the net inheritance will also influence the final taxes you must pay. If you’re a US citizen or expat in Germany and you receive an inheritance abroad from a German resident, you won’t be required to pay any inheritance tax while filing US expatriate tax returns. This rule applies only to assets located abroad outside the US. Germany does not require you to pay a Wealth Tax.
Read also: Making a Will in Germany – Why I Did It Already in My 30s
Capital Gains Tax on Real Estate
Any investment property that US citizens own abroad in Germany is subject to Capital Gains Tax. If you did not live in the property and owned it for less than 10 years, the tax is applicable in Germany. Further, if you earned rental income from a German property, you’ll be accountable for taxes both the US and Germany.
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Capital Gains Tax on Investments
The profits that you earn from the sale of investments are taxable in the US and Germany depending on the time for which you held the investment. If you owned assets for less than a year, you’ll pay Short-term Capital Gains Tax. Conversely, if you held the assets for more than 12 months before selling them, the profits will earn Long-Term Capital Gains Tax. If you earn interest on funds such as the balances in your savings account, the German bank will deduct the applicable taxes.
Germany levies a rate of 25% on your returns from investments. However, if you incurred any losses from the investments, you can claim a deduction from the income you earned from the sales of any other investments. Do keep in mind that at the time of filing expatriate tax returns in the US, you must report your gains abroad by completing and submitting a Form 8949, Schedule D. Figuring out whether your capital gains are taxable abroad in Germany or the US can be confusing and it is always advisable that you check with a professional tax consultant who can guide you.
As a US citizen living abroad in Germany, do take the time to read up on the requirements and regulations applicable to tax returns back home and in your host country. Become aware of the benefits available to maximize savings and comply with the taxation deadlines in both countries. You’ll also ensure that you avoid incurring any fines and penalties, and enjoy the advantages of life as a resident of Germany.
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Disclaimer
The opinions expressed by the guest writer in this article are from the guest writer only and do not necessarily reflect the opinions of this blog. This blog is not responsible for the accuracy of any of the information supplied by the guest writer.
Our blog makes no guarantee as to the accuracy or timeliness of the information in this guest article. If you need more details and specific advice on your personal situation, we would highly recommend you to consult a tax adviser or the tax office.
How do you file taxes in Germany and in the US? Leave a comment below and share your experience!
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I have found this article very informative, however, there is nothing here about Expats retiring in Germany. How is a retiree taxed as far as US Social Security, payments from an Annuity and pension payments? If I sell my house in the US and take that money to Germany to buy property to live in, is that taxed?
Sean, thanks for reading and your comment! I myself am not an expat for taxes on US expats. I have asked Protax Consulting and here is their answer:
“The answer to that question can become complex for many people! The source of the pension effects taxation. (Social security is going to be treated differently than a pension from a place of work.) So for a thorough answer that speaks to your reader’s own situation, I would encourage them reader to consult with an expert. The short answer, though, is for a US citizen living in Germany, most forms of US-based retiree income will be taxed by both the US and Germany.
As for the sale of a US property, folks are taxed by Germany only on their German-sourced income.”
Hope it helps!