Tax guide for Americans in Germany

Navigating taxes as a US expat in Germany doesn't have to be overwhelming! With Germany's progressive income tax structure, additional surcharges, and US tax obligations in the mix, it can feel like managing two sets of rules.

But with the right strategy, you can make it all work smoothly. Germany and the US offer valuable tax treaties, credits, and deductions to help reduce your tax burden and avoid double taxation.

This guide is your one-stop resource for everything from determining tax residency to understanding German income tax, business tax rates, and when and how to file.

Whether you're settling in for the long haul, running a business, or working remotely, understanding both the German and US tax systems will help you stay compliant and take full advantage of available tax breaks.

Overview of Germany

What types of taxes are there in Germany?

Germany has a multi-tiered tax system with several types of taxes affecting individuals, including income tax and value-added tax.

Personal income tax rates

Income tax rates in Germany are progressive, meaning they increase as your income increases. For 2024, the tax rates are as follows:

*Geometric progressive rates start at 14% and increase to 42%.

Solidarity surcharge

Originally introduced to help with the costs of reunification, this 5.5% surcharge applies to high-income earners on top of income tax, but it's mostly phased out for lower- and middle-income earners.

Value-added tax

German VAT (Umsatzsteuer) is like a little extra sprinkle on everything you buy - except that sprinkle costs 19%. From groceries to gadgets, you'll find VAT woven into your everyday spending. Thankfully, there's a lighter 7% rate for essentials like food, books, and public transportation.

Well, for expat entrepreneurs and freelancers who bill clients in Germany, VAT isn't just a silent partner in your purchases. It can apply directly to your services, adding an extra layer to invoicing. So while VAT won't show up on your income tax forms, it's definitely something to keep in mind when pricing your next project!

Property tax

Germany levies an annual property tax (Grundsteuer) on property owners, which is based on the assessed value of the property and varies by municipality. Rates typically range from 0.26% to 1%, with higher rates often seen in bustling urban areas.

For expats, this tax is an ongoing expense that must be planned for. However, US expats may be able to deduct this cost when filing their US tax return if the property is classified as an investment. This deduction can make a noticeable difference in managing cross-border tax obligations.

Inheritance and gift tax

Inheritance and gift tax (Erbschaftsteuer und Schenkungsteuer) in Germany applies to both residents and non-residents who inherit assets in Germany. Tax rates vary widely depending on the relationship between the donor and the recipient:

• Spouses and children. Tax rates for close family members range from 7% to 30%, with higher rates for larger inheritances. Exemptions include €500,000 for spouses and €400,000 for children.
• Other Relatives and Unrelated Persons. Rates for distant relatives or unrelated beneficiaries range from 15% to 50%, with smaller exemptions.

Church tax

Church tax (Kirchensteuer) is unique to Germany and applies to individuals registered with certain religious organizations. It is usually 8-9% of your income tax liability, although the exact rate varies from state to state. However, expats can avoid this tax by formally deregistering from the church if they are not practicing members.

Church tax is automatically deducted for those who are registered, so expats must update their registration status with local authorities if they wish to avoid this additional expense. This tax may also affect US tax returns, as it may qualify as a deductible foreign tax.

Dog tax

In Germany, even your furry friend has a tax bill - the dog tax (Hundesteuer)! This municipal fee, which typically ranges from $90 to $200 for the first pup, is Germany's way of saying, "We love dogs, but they come with responsibilities!" Fees can jump for each additional dog, and certain high-energy breeds can cost even more.

For expats, this quirky expense is something to keep in mind when bringing your four-legged family members. Pet registration is required, and skipping the dog tax could result in fines from local authorities.

Estate tax

The German estate tax is similar to the inheritance tax and applies to assets transferred after death. The tax rate and exemptions vary depending on the relationship between the decedent and the beneficiary.

Real estate transfer tax

In Germany, real estate purchases are subject to a land transfer tax (Grunderwerbsteuer). This tax, which is payable by the buyer, varies from state to state, with rates ranging from 3.5% to 6.5% of the property's sale price. Rates in major cities and states, such as Berlin and Hamburg, tend to be on the higher end of this spectrum.

For expats buying property in Germany, the land transfer tax is a one-time expense added to the purchase price of the property.

This tax is not deductible for US tax purposes but should be factored into the overall budget of anyone considering buying property in Germany.

Capital gains tax

Capital gains tax (Kapitalerträge) in Germany applies to gains from the sale of certain assets, such as stocks, bonds, and real estate, although different rules apply to each type of asset.

• Stocks and securities. Capital gains from the sale of stocks and securities are subject to a flat 25% tax, plus a 5.5% solidarity surcharge. This results in an effective rate of approximately 26.375% for most investors. Notably, an exemption applies to annual capital gains under €801 for singles and €1,602 for married couples.
• Real estate. Gains from the sale of property held for more than 10 years are exempt from capital gains tax. However, if the property is sold within 10 years of purchase, gains are fully taxable, which can be significant for expats with property investments in Germany.

The interplay between German and US capital gains taxes may require careful tax planning for US expats, as the IRS may still tax certain foreign capital gains after applying for appropriate exclusions or credits.

Trade income tax

Trade tax (Gewerbesteuer) applies to businesses operating in Germany. This tax is levied at the municipal level, which means that rates vary depending on the location of the business. In general, rates range from 7% to 17%, with higher rates often found in large urban centers.

The business tax base is determined by calculating taxable income, with a standard deduction of €24,500 for unincorporated businesses. The resulting income is then multiplied by a municipal rate (Hebesatz), which varies by location.

Corporations are fully subject to business tax on their income, while sole proprietors and partnerships can deduct a portion of the business tax from their income tax liability.

For US expats owning or operating businesses in Germany, this tax structure means a potentially higher overall tax liability.

It's important to consider business income tax when planning your business, as the tax is not directly deductible on a US tax return but can be taken into account when calculating foreign tax credits.

Tax rate in Germany compared to the US

To give you a better idea of how high German tax rates can be, here's a comparison chart that highlights the key differences in tax rates and structures between Germany and the US:

Filing income tax returns

Filing taxes as a US expat in Germany can be complex, as you must comply with both German and US tax laws.

Knowing when and how to file, along with understanding the penalties for mistakes, is key to staying compliant and avoiding unnecessary fines.

When to file tax returns

In Germany, the standard deadline for filing tax returns is July 31 of the following year. However, if a certified tax advisor prepares the return, the deadline is extended to February 28 of the following year.

US expats should remember that the IRS also has deadlines for filing US taxes abroad. The typical deadline for US federal taxes is April 15, but expats receive an automatic extension to June 15. Additional extensions may be available upon request until October 15.

Expats in Germany should carefully coordinate these deadlines to avoid overlap and ensure they maximize tax benefits under both systems.

How to file a tax return

The following methods are available for filing tax returns in Germany

• Online via ELSTER. The German tax authorities provide an online platform, ELSTER, for filing income tax returns. This method requires registration, which can take several weeks, so it's advisable to set up an account well before the filing deadline.
• Through a tax accountant. Many expats choose to work with a tax accountant due to the complexity of the German tax system. An accountant can help optimize deductions, overcome language barriers, and ensure compliance with both German and US tax regulations.
• Paper filing. Paper returns can also be filed, although this method is slower and less commonly used. Paper forms are available from local tax offices.

Penalties for late or incorrect filing

Germany enforces strict penalties for late or inaccurate filings:

• Late filing penalty. Failure to meet the July 31 deadline may result in a late filing penalty of 0.25% of the tax due per month, with a minimum of €25 per month.
  Expats using a tax advisor can avoid this penalty if the advisor's extended deadline is met.
• Interest on unpaid taxes. In addition to late filing penalties, unpaid taxes are subject to interest at the rate of 0.5% per month (6% per year) from the filing deadline until the amount is paid.
• Penalties for improper filing. Fines and penalties may also be imposed for false or fraudulent information. The amount of the penalty depends on the nature and severity of the errors, with intentional misrepresentations subject to criminal prosecution and possible fines.

Social security in Germany

Germany's social security system is comprehensive and includes health insurance (Krankenversicherung), pension insurance (Rentenversicherung), unemployment insurance (Arbeitslosenversicherung) and long-term care insurance (Pflegeversicherung). Expats working in Germany are usually required to participate in this system, with contributions being automatically deducted from their wages.

• Social Security contributions are split between employees and employers. The total contribution rate is approximately 40% of an employee's gross salary, with half paid by the employee and half by the employer. Specific rates vary slightly for different types of insurance, such as pension and health insurance.
• In order to avoid double social security taxation, the US and Germany have a totalization agreement. This allows expats to contribute to only one country's system if certain criteria are met. Expats working temporarily in Germany can apply for an exemption from German social security contributions, allowing them to remain in the US system.

Deductions and credits for expats in Germany

US expats in Germany have access to several deductions and credits to help mitigate the impact of paying taxes in both countries.

• Foreign Earned Income Exclusion. The FEIE allows qualifying expats to exclude up to $120,000 (limit 2023) of foreign-earned income from US taxation. To qualify, expats must meet either the Physical Presence Test (330 days in a 12-month period) or the Bona Fide Residence Test, which requires proof of an extended period of residence.
• Foreign Tax Credit. The FTC can be used to offset US taxes with foreign taxes paid to Germany. This credit is particularly beneficial for those with income above the FEIE threshold, as it reduces potential double taxation. By claiming the FTC, expats can deduct a portion of the German taxes paid from their US tax liability.
• Housing exclusion or deduction. Expats paying for housing in Germany may qualify for a housing exclusion or deduction on their US tax return. This allows for additional exclusions for housing expenses, which is especially beneficial for expats in high-cost cities such as Munich or Frankfurt.

The tax treaty between the US and Germany

The tax treaty between the United States and Germany is designed to prevent double taxation for individuals and corporations operating in both countries. The treaty determines which country has primary taxing rights on various types of income, helping expats avoid paying taxes twice on the same income.

Key elements of the treaty include:

• Allocation of taxing rights. The treaty outlines the types of income that Germany or the US has the primary right to tax. For example, most employment income earned in Germany is taxable only in Germany, while US source income may remain taxable in the US
• Taxation of pensions. The treaty determines which country has the right to tax pension income, generally allowing only one country to tax such income based on the retiree's residence. This is particularly beneficial for retired expats who wish to avoid double taxation on their pensions.
• Relief from Double Taxation. By taking advantage of the treaty, US expats can claim foreign tax credits on their US tax returns, reducing or eliminating their US tax liability for income already taxed in Germany.

Most popular tax forms for US expats

US expats living in Germany must file various tax forms to comply with both US and German regulations. The most common forms are listed below:

1. Form 1040. The US individual income tax return is required for all US citizens, regardless of residency. Expats in Germany file Form 1040 and report their worldwide income. To avoid double taxation, expats can attach additional forms, such as the Foreign Earned Income Exclusion or Foreign Tax Credit, to reduce their tax liability.
2. Form 2555. Used to claim the Foreign Earned Income Exclusion (FEIE), this form allows expats to exclude up to $120,000 of foreign-earned income from US taxation. Eligibility is determined by meeting the physical presence or bona fide residence test.
3. Form 1116. For expats who choose the Foreign Tax Credit (FTC) instead of the FEIE, Form 1116 allows them to claim a dollar-for-dollar credit against US taxes for income taxes paid to Germany. This is useful for those whose income exceeds the FEIE threshold or who have investment income.
4. FBAR (FinCEN Form 114). US expats with foreign bank accounts that total more than $10,000 during the calendar year must file the Foreign Bank Account Report (FBAR). This form helps the IRS track foreign financial assets and is a mandatory filing requirement to avoid potential penalties.
5. Form 8938 (FATCA). Under the Foreign Account Tax Compliance Act, expats with significant foreign financial assets may be required to file Form 8938 if their account balances exceed certain thresholds. While similar to the FBAR, this form is filed with the IRS along with the expat's tax return.

German tax forms for US expats

US expats living and working in Germany are required to file several local tax forms to comply with German tax authorities. These forms ensure that income, deductions, and other financial details are properly reported:

1. Einkommensteuererklärung. This is the main German income tax return form. Expats earning income in Germany must file this annually with their local tax office. The form includes sections for reporting wages, self-employment income, capital gains, and deductions.
2. Schedule N (Employment Income). If you're an employee in Germany, this supplemental form reports earned income. Expats should include details such as salary, bonuses, and employer-provided benefits.
3. Anlage AUS (Foreign Income). For income earned outside of Germany, Anlage AUS is used to report foreign income. This form is essential for expats who continue to have income from US sources, as it helps determine the potential for German tax credits on foreign income.
4. Anlage KAP (Capital Gains). Expats with investment income, such as dividends or interest, must file the KAP form. It covers capital gains, and German tax authorities may assess tax based on the specified rates for investment income.

Living expenses for US expatriates in Germany

One of the most important considerations for US expatriates in Germany, aside from understanding tax obligations, is to be aware of the living expenses in Germany.

While this page doesn't go into the specifics of the cost of living, it's important to note that these costs can vary significantly depending on the city and lifestyle.

Large cities such as Berlin, Munich, and Frankfurt generally have a higher cost of living than smaller towns. Typical living costs in Germany include rent, utilities, transportation, food, health insurance, and entertainment.

Therefore, it's important for expatriates to budget wisely and stay informed about the cost of living in their chosen German city.