Germany is a favored destination for expatriates due to its excellent quality of life, strong economy, and rich cultural landscape. Expats in Germany enjoy access to high-quality healthcare, efficient public transportation, and robust educational systems. However, understanding the tax obligations in both Germany and the US can be challenging for US expats living abroad.
At Robert Hall & Associates, we’ve helped numerous US expats in Germany manage their dual taxation responsibilities and ensure compliance with both German and US tax laws. Here’s what you need to know about tax filing requirements for US expats in Germany.
Quick Facts about Germany’s Tax System:
- Primary Tax Form for Residents: German tax return (Einkommensteuererklärung)
- Tax Year: January 1st to December 31st (calendar year)
- Tax Deadline: July 31st
- Currency: Euro (EUR)
- US Expat Population: Over 150,000
- Capital: Berlin
- Language: German
- Tax Treaty with the US: Yes
- Totalization Agreement with the US: Yes
What Are the Tax Obligations for US Expats in Germany?
US citizens living abroad, including in Germany, generally need to file taxes in both countries. US citizens are required to file a US federal tax return, while most expats in Germany must also file a German tax return. The good news is that the US-Germany tax treaty helps prevent double taxation, though navigating both tax systems can be complicated.
Who Needs to File Taxes in Germany?
If you are a tax resident of Germany, you are taxed on your worldwide income. Non-residents, on the other hand, are taxed only on income sourced from Germany. If your only income comes from a German employer, you might not need to file a tax return, as taxes are often withheld at the source. However, US expats typically must file a German tax return if they:
- Are self-employed
- Have multiple income streams
- Receive income from foreign assets
Even if you are not required to file, it’s often beneficial to do so, as you may qualify for tax deductions and exemptions that could result in a refund.
What Qualifies You as a Tax Resident in Germany?
Tax residency in Germany is based on where you live rather than your nationality. You’re considered a resident if you have a habitual abode or domicile in Germany:
- Habitual abode: Living in Germany for at least six months in the tax year.
- Domicile: Owning a permanent residence in Germany, regardless of how much time you spend there.
If you don’t meet these criteria, you are considered a non-resident for tax purposes. Leaving Germany and cutting financial ties generally terminates your tax residency, and there is no exit tax when you give up residency.
Understanding Different Types of Taxes in Germany
Germany has several types of taxes that expats need to be aware of, including income tax, value-added tax (VAT), and other levies. Here’s a breakdown of key taxes that may affect you as a US expat:
1. Income Tax
Germany taxes various forms of income, including wages, salary, rental income, and investment income. Income is taxed progressively, and the 2023 tax rates for single and married residents are:
- Income less than €10,908: 0%
- €10,909 – €62,809: 14%-42%
- €62,810 – €277,825: 42%
- Above €277,826: 45%
2. Capital Gains Tax
Capital gains from shares and other investments are taxed based on the size of your stake and how long you’ve held the asset. If your interest in a company exceeds 1%, 60% of the gain is taxable. For smaller stakes, a flat tax rate of 26.375% applies.
3. Inheritance and Gift Tax
Inheritances and gifts in Germany are subject to taxation at rates ranging from 7% to 50%, depending on the circumstances.
4. Church Tax
If you’re registered with an official church in Germany, you may owe a church tax of about 8%-9% of your income.
5. Property Tax and Real Estate Transfer Tax
Property taxes are levied by municipalities, and real estate transfers are taxed at rates ranging from 3.5%-6.5%.
6. Solidarity Surcharge
The solidarity surcharge is an additional fee on top of income, capital gains, and corporate taxes for top earners, currently set at 5.5% of the tax amount.
7. Value-Added Tax (VAT)
Germany’s standard VAT rate is 19%, with a reduced rate of 7% on essentials like food and books. Business owners must file quarterly VAT returns.
Social Security Contributions for US Expats in Germany
Germany’s social security system is similar to that of the US. A totalization agreement between the US and Germany ensures that you only contribute to one country’s system at a time:
- If assigned to Germany by a US company for less than five years, you’ll pay US Social Security.
- For longer assignments or if working for a German employer, you contribute to the German system.
Self-employed Americans can choose which system to contribute to.
Tax Forms for US Expats Living in Germany
US expats in Germany must file both US and German tax forms to stay compliant. Here’s what you need to file:
German Tax Forms
- Mantelbogen ESt 1V: For expats with only German-sourced income.
- Mantelbogen ESt 1A: For expats with multiple or foreign income sources.
- Mantelbogen ESt 1C: For non-residents.
The filing deadline is July 31, but an extension to December 31 applies if you use a professional tax preparer.
US Tax Forms
- Form 1040: The standard US tax return, due June 15 for expats (with an option to extend to October 15).
- Form 8938 (FATCA): For reporting foreign financial assets exceeding certain thresholds.
- FinCEN Form 114 (FBAR): Required if you hold over $10,000 in foreign accounts.
Does the US Have a Tax Treaty with Germany?
Yes, the US and Germany have a tax treaty that helps prevent double taxation. Under this treaty, US citizens living in Germany may be able to claim credits like the Foreign Tax Credit, which reduces US tax liability on income already taxed in Germany.
Conclusion
Navigating the tax obligations for US expats living in Germany can be complex, but the tax treaty between the two countries helps minimize issues like double taxation. If you need personalized assistance with your US or German tax returns, the experts at Robert Hall & Associates are here to help. Contact us today for more information or to schedule a consultation with one of our tax professionals.