As a general rule, all U.S. citizens and green card holders are required to file a U.S. federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated. So, considering that the USA is one of only two governments in the world that taxes the international income of its citizens even if they live abroad, taking care of your U.S. expat is a fundamental part of the overseas life experience.
In this, we will focus on how expat taxes will affect a U.S. citizen or green card holder working and living in Germany.
German Taxes for American Expats
Overall, Germany and Europe are not particularly famous for their low tax regime. Moreover, the tax systems of Germany and the USA differ significantly, so expats must inform themselves well.
German Income Tax Rates for U.S. Expats
The rate of income tax in Germany ranges from 0% to 45%. The German income tax is a progressive tax, which means that the average tax rate increases monotonically with increasing taxable income.
Who Qualifies as a Resident of Germany?
To pay German individual income tax, you must hold a German residence status, or your habitual address is located in Germany. A resident of Germany generally refers to an individual who has a domicile in Germany or spends more than 6 consecutive months in Germany (habitual place of abode). A domicile is a home or dwelling owned by, or rented to, the taxpayer who has full control over the property. It is determined by the surrounding factual circumstances, not by the taxpayer’s intention.
The general rule is that a person who is a resident of Germany is assessable on the individual’s worldwide income at the German tax rate. Non-residents are generally determinable only on income derived from German sources. It is important to note that German property owners will be subject to taxation regardless of their tax residency status.
When Are German Taxes Due?
The fiscal year in Germany corresponds to the US – the calendar year January 1st to December 31st. Tax returns must be filed by 31 July, but if a professional prepares the return, the deadline is automatically extended until December 31st. A new extension is available for February 28 (29) of next year, but requires a written request.
U.S.-German Tax Treaty
There is some good news here since not all income is taxed in Germany. Due to double taxation treaties, although an expatriate will first pay a more significant amount to the German government, they will end up benefiting from the U.S. expatriate tax savings by filing his return with the Internal Revenue Service. In simple words, a tax treaty is a bilateral agreement made by two countries to resolve double taxation issues with the income tax, corporation tax, and capital gains tax of each of their respective citizens. Germany reached tax agreements with around 90 countries to avoid double taxation.
For the U.S.-German Tax Treaty, for most types of income, the established solution for U.S. expatriates to avoid double taxation in Germany is to claim U.S. tax credits against the German taxes they paid on their income, and expatriates can claim German tax credits against income taxes paid to the IRS on U.S. income. To claim U.S. tax credits against German taxes paid, expatriates must complete Form 1116 (Foreign Tax Credit) when completing Form 1040.
The U.S.-German Tax Treaty also covers corporation taxation, stating that a company will be taxed in the country where it is registered unless it has a ‘permanent establishment’ in the other country, in which case the profits from the permanent establishment will be taxed in that country where it is located.
Dividends, royalties, and interest are covered separately in the treaty. It is specified in the U.S.-German Tax Treaty that royalties and interest will only be taxed in the recipient’s country of residence, regardless of the source of income.
Social Security in Germany
Germany has an elaborate social security system to ensure its citizens live comfortably, even sick, disabled, unemployed, or retired. Expatriates can also participate in the system. Employees must, as a rule, make payments for health insurance, long-range nursing care, pensions, and unemployment. These payments typically amount to about 40% of gross income, but the employer usually pays half the cost, meaning that the employee out-of-pockets only 20% of their income. Other pillars of the social security program are business accident insurance, fully paid for by the employer, and social indemnity, with the responsibility of the State.
American expatriates will be enrolled in the German social security program as soon as their employment begins. However, this does not apply to expatriates working in Germany for a company outside the country.
Other Taxes in Germany
Corporation Taxes in Germany
Corporation tax is imposed on a company’s profits, consisting of business/trading income, passive income, and capital gains. Business expenses may be deducted in computing taxable income. Corporation tax is levied at a uniform rate of 15% and after is subject to a surcharge of 5.5% (solidarity surcharge) for 2021.
Real Estate Taxes in Germany
Real properties are levied by the municipality in which real estate is located, at a rate of 0.35% of the tax value of the property, multiplied by a municipal coefficient. Real estate capital gains are taxed only if the owner has not occupied the property and has been held for less than ten years.
File U.S. Taxes With Evolution Tax and Legal’s U.S. Expat Tax Services
With proper guidance and planning, you should be able to make use of tax strategies to reduce or even eliminate your U.S. tax bill while residing in Germany. The expat tax attorneys at Evolution Tax and Legal can lead you through this path, knowing which tax rules apply to you and understanding the exclusions and credits that you, as U.S. expat, can claim when filing your tax returns.