What every US citizen needs to know about German Taxes
If you are a US expat living in Germany, you may have already realized how difficult it can be to navigate two tax systems. Differing tax deadlines, income tax rates and brackets, and reporting requirements only complicate the situation. Understanding a few of the basic guidelines for expats in Germany can help ensure that you become and stay compliant in both countries.
Are You a German Resident?
Before handing over any of your hard-earned income to tax authorities, let’s make sure you are a resident. In Germany, you are considered a tax resident if you arrive in the country intending to stay for a period longer than six months. Residency can be proven by establishing a residence within the country. However, to end your tax resident status, all you need to do is leave Germany without any ties – such as a primary residence, financial ties, or other connections. This is even true for German nationals!
German Income Tax Rates
Now that you are certain you qualify as a tax resident, let’s dive in to how much you may owe. The German rates may seem high to the American rates you are used to, but knowing what to expect is important. Taxable income in Germany is employment income net of allowable and standard deductions. The current rates are listed below for your convenience.
Important Tax Deadlines in Germany
Though the tax year in Germany is the same as it is in the US (January 1st - December 31st), the deadlines differ. German taxes must be filed by July 31 of the year following the tax year, whereas the American deadline is April 15 (April 15 in 2024). In Germany, one of the many benefits of having your taxes prepared professionally rather than attempting them yourself is that there is an automatic extension until December 31st!
The deadline for filing federal income taxes in the United States for 2024 is Monday, April 15. If you live in Maine or Massachusetts, you have until Wednesday, April 17, due to the Patriots' Day and Emancipation Day holidays in those states. If you need additional time to file, you can request an extension, which will give you until October 15, 2024, to submit your tax return. However, any taxes owed are still due by the original filing deadline in April to avoid penalties and interest
US Taxation
As an American expatriate living and paying taxes in Germany, you are still required to file a U.S. Federal Tax Return. Despite this, several provisions can help protect you from double taxation. These include:
- Foreign Earned Income Exclusion (FEIE): This allows you to exclude a certain amount of foreign-earned income from your taxable income. For the 2021 tax year (filed in 2022), the exclusion amount was $108,700. For the 2022 tax year (filed in 2023), the exclusion amount increased to $112,000. For the 2023 tax year (filed in 2024), this amount typically adjusts for inflation; you should check the IRS guidelines for the exact figure applicable.
- Foreign Tax Credit (FTC): This provision allows you to reduce your U.S. tax liability by the amount of income tax you paid to a foreign government. This credit can be claimed on IRS Form 1116 and is beneficial if your foreign tax rate is higher than the U.S. tax rate on the same income.
- Foreign Housing Exclusion: This exclusion allows you to exclude certain housing expenses from your income if you live and work abroad. The exclusion is for amounts paid for household expenses that arise from living overseas, which can include rent, utilities, and other related costs. This can be claimed using IRS Form 2555 along with the Foreign Earned Income Exclusion.
These provisions aim to mitigate the impact of double taxation for U.S. citizens living abroad. It is important to stay updated with the IRS guidelines each year, as exclusion amounts and requirements can change.For 2024, ensure you file your U.S. Federal Tax Return by the deadline, which is April 15, 2024. If you need additional time, you can request an extension, giving you until October 15, 2024. Be mindful that any taxes owed are still due by the original deadline to avoid penalties and interest.
For more detailed guidance, consult with a tax professional who specializes in expatriate tax issues.
US-Germany Social Security Agreement
When you become employed in Germany, you are enrolled in the German Social Security program. However, to avoid double taxation, the US-Germany Social Security Agreement helps explain to which country social security taxes are payable. For example, if you are in Germany for less than five years, you will pay into American Social Security. If you work in Germany in excess of five years, you will pay into German Social Security.
US-Germany Tax Treaty
The US-Germany Tax Treaty is another provision that helps circumvent double taxation and clarify to which country taxes are due. The factors that are considered in this treaty are where the taxpayer resides and works, the income was paid, and the employer is located.
Other Taxes to Consider
- Investment and Capital Gains Tax – This is a flat rate of 25%. Losses on investments and the sale of assets can be deducted from the income earned on other investments or assets.
- Inheritance Tax – These graduated rates range from 7% to 50%; however, no German wealth tax exists.
- Capital Gains Tax on Real Estate – This tax is levied only if the real estate was not self-occupied and held for less than 10 years. In Germany, rental income is only taxed by the country in which the rental is located.
- Solidarity Surcharge – A 5.5% income tax levied on income. This tax goes to the reunification of Germany and has historically endeavored to help the East side of formerly communist Germany successfully reintegrate. The solidarity surcharge is required of anyone who owes any form of tax in Germany.
