Taxes 101 for American Expats Living in Germany
Oct 09, 2017
In this FBAR Wiz exclusive, we explore the most pertinent aspects of Germany taxes applicable to American expats living and/or working in Germany. It is very important to note that American expats living in Germany for shorter amounts of time are highly likely to have FBAR and/or Form 8938 filing obligations. To check if you have to report foreign assets and/or foreign accounts to the IRS, check out the free and anonymous FBAR Wiz app to detect if you have to file the FBAR form and other forms. To begin, you will be considered a resident of Germany if you arrive with the intention of staying for a time period longer than six months. Residency can be proven by establishing a residence within the country – or having a presence in Germany that indicates you’re staying for the long term. On the other hand, leaving Germany without any ties (primary residence, financial or other connections) is enough to end your tax resident status. Even being a German national is not enough to establish tax residency – if you leave the country, you are not considered a resident for taxation purposes. German Income Tax Rates The German tax rate is relatively high in comparison to United States tax rates. Though you will typically pay more to German tax authorities up front, the benefit you gain is savings on your U.S. tax return when filing with the IRS as one of the many American expats living in Germany. Taxable income in Germany is employment income, post allowable and standard deductions. The tax threshold is currently EUR 8,652 for a single individual and EUR 17,304 for those married filing jointly. The tax rate is progressive, based on income, while reaching the first cap of 42% at EUR 53,665. This rate will then be applied until the second threshold, EUR 254,446, is reached. Any income surpassing EUR 250,736 will be taxed at 47.5%. Taxable Income (EUR) Tax Rate (%) 8,652 0 8,653-53,665 14-42% 53,666 – 254,446 42% 254,447 and above 45% Deductions from your income will include a EUR 1,000 standard deduction. If you have unreimbursed business expenses (which must be proven with receipts), you can itemize the deductions from your income. Personal deductions (obligatory future care) cap at EUR 6,591. You’ll also find there are monthly deductions for allowances paid to children, starting at EUR 190 per child (two children) and cap at EUR 221 (four or more children). There is also a basic child deduction of EUR 3,624 per dependent child for a single parent. That amount is doubled, at EUR 7,248, if a married couple files jointly. There are no regional taxes; however, a church tax is applied to registered members of an official church. This tax varies, but is usually around 8-9% of an individual’s income tax. Taxpayers in Germany will also be subject to a solidarity surcharge of 5.5% of taxes paid, making the actual highest income tax rate 47.48%. Applicable German Tax Due Dates Germany’s tax year is the same as the US, January 1 through December 31. This timeline should make it easier when it comes time to file, and possibly reduce the amount of time and work put into filing taxes for both countries. Your taxes must be filed by May 31st of the year following the tax year. You will receive an automatic extension to December 31st if you have your taxes done by a tax professional. There’s also an extension option until February 28th of the subsequent year, though you’ll need a written application for this. If you owe taxes, your payment will be due a month after the German Ministry of Finance issues the income tax assessment notice. Late filing penalties are limited to 10% of your assessed German taxes, but cannot exceed EUR 25,000. There is a late fee of 1% of your taxes due for each month the taxes have an outstanding balance. Interest is also assessed on late taxes owed at the rate of 0.5% each month. For American expats in Germany, if you have a residence or abode in Germany, you’ll need to file an unrestricted tax return. Otherwise, you’ll file a restricted tax return if your employer has no obligation to withhold German taxes. For further info digging into the FBAR and Form 8938 requirements for expats, check out this related blog post. Other Taxes In Germany
- Investment and Capital Gains Tax – 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. The system is set up so taxation is deducted at the source.
- Inheritance Tax – Graduated rates from 7% to 50%. There is no wealth tax.
- Capital Gains Tax on Real Estate – Levied only if the real estate was not self-occupied and held for less than 10 years. In Germany, rental income is only to be taxed by the country in which the rental is located.
It’s a good idea to educate yourself on the requirements and regulations regarding expat taxes for American expats in Germany in order to maximize your savings and prevent missing important deadlines. And, of course, consulting with a tax attorney is always the best route to take. You should also check your filing obligations via the free FBAR Wiz app. U.S. - Germany Social Security Agreement As soon as your employment begins in Germany, you will be enrolled in the German Social Security program. Note that this doesn’t apply to those working in Germany for a company located outside of Germany. The US-Germany Social Security Agreement describes which country social security is payable to for American expats in Germany who are working there. If you are assigned to work in Germany for five years or less by your US company, you’ll continue paying into US Social Security. If you’re on an assignment longer than five years or if you are working for a non-US employer in Germany, you’ll pay into German Social Security. In fact, you will remain insured with the German state pension scheme if you work temporarily for your German employer in the USA and your stay does not last longer than five years and you work for a limited period of time from the onset. Check out this related blog post on tips for expats to draw less scrutiny from the IRS.