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 17 in 2022). 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!
Even if you live and pay taxes in Germany, you are still required to file a US Federal Tax Return. In fact, as an expat, you face additional filing requirements! However, provisions are in place to protect you from double taxation. These provisions include the Foreign Earned Income Exclusion, which allows you to exclude the first $108,700 of your 2021 (filed in 2022) and $112,000 of your 2022 (filed in 2023), in taxable income earned as a result of your labor while residing in a foreign country. Next, the Foreign Tax Credit allows you to lower your US tax obligation on your income by certain amounts paid in taxes to a foreign government. Lastly, the Foreign Housing Exclusion is an additional income exclusion for amounts paid for household expenses that occur from living overseas.
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.
Want Help with Your Specific Expat Taxes?
If you have more detailed questions about tax requirements in Germany, contact us today! Greenback Expat Tax Services specializes in expat taxes, so you can be sure that we will find every deduction and exclusion available to you. Our expat-expert accountants are ready and waiting to answer any of your questions.