Tax Overview for U.S. Expats Living and/or Working in Germany - FBAR and Beyond!
Sep 22, 2017
In this post, the FBAR Wiz will give you the scoop on FBAR and other IRS filing obligations for U.S. expats living and/or working in Germany. Before reading this article, you may want to quickly check what disclosure obligations you have by using the free FBAR Wiz app. If you are paying income tax in Germany, there are several mechanisms that prevent you paying tax on the same income to the IRS. The two primary ones are the Foreign Earned Income Exclusion, which allows you to exclude the first around $100,000 USD of foreign earned income from US income tax if you can demonstrate that you are resident in Germany, and the Foreign Tax Credit, which allows you a dollar credit for every dollar of tax you've paid in Germany. The Foreign Tax Credit is typically a sensible option if you pay more tax in Germany than you would owe in the US, as you can carry the excess tax credits forward. Don't forget though, even if you don't owe any tax in the US, if your income is above $10,000 USD (or $400 USD for self-employed individuals) you still have to file. As you know from prior posts, all US citizens and green card holders who earn a minimum of $10,000 (or just $400 for self-employed individuals) anywhere in the world are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated. The good news is if you are already paying income tax in Germany, there are various exclusions and exemptions available to prevent you paying tax on the same income to the IRS too. If your income is over $10,000 USD (or $400 USD for self-employed individuals), you must file the Form 1040 (the basic U.S. tax return). While any tax is still due by April 15, 2017, expats get an automatic filing extension until June 15, 2017. This can be extended still further online until October 15, 2017. If you have foreign assets worth over $200,000 USD (per individual), excluding a home owned in your own name, you also need to file a Form 8938 declaring them. If you had more than $10,000 USD in aggregate in one or more foreign bank accounts at any time during the tax year, you also need to file FinCEN form 114, known as the almighty FBAR (Foreign Bank Account Report). The U.S. and German governments share taxpayer info, while German banks pass on their U.S. account holders' account info to the IRS, so it's not worth being economical with the truth or burying your head in the sand. The penalties for tax evasion for expats are tough to say the least. If you're a U.S. citizen or green card holder (including dual citizens) and you have been living in Germany for some time but weren't aware that you should be filing a U.S. tax return, don't worry: there's a program called the IRS Streamlined Procedure that allows you to catch up on your filing without paying any fines. It is better to do this premptively though, before the IRS makes the first move. Key Points of how Germany Taxes It is important to note that German tax returns are due by May 31, 2017, or, if your return is prepared by a CPA/accountant, by December 31, 2017. If you're employed by a German company though and your income is taxed at source, you are not required to file a return. That said, many people do anyway, as after claiming certain allowances (such as for child support) they may be entitled to a refund. The German equivalent of the IRS is called the BZSt (i.e., Bundeszentralamt für Steuern), and the German tax return form is called form ESt 1. Note that German income tax rates are relatively high compared to those in the United States, so for many people it makes sense to claim the Foreign Tax Credit. Alongside income tax, there is also a 'solidarity tax' of a maximum of 5.5% of the income tax you owe. We strongly recommend that if you have any doubts or questions about your tax filing situation as a US expat living in Germany, that you contact an offshore disclosure tax specialist. For an interesting post pertaining to Indian expats living and/or working in the United States, check out this related blog post.