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Your Definitive Guide to Paying Taxes as a U.S. Expatriate in Germany

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Are you stymied when it comes to paying Taxes in Germany as a US expatriate? Matters of taxation may seem complicated to US expats who are Living in Germany. Not for long though because we intend to simplify them for you.

We’ll start with:

Techniques to Prevent Double Taxation

First, declare all your bank accounts. Know that the declaration of bank accounts is only foreign. And you have to declare all your foreign accounts only when their combined balance reaches 10,000 USD any time during the year. For instance, if you already have 8000 USD and someone makes a deposit of 3000 USD in your account, your account will be reported even if you are left with less than that at the end of the year.

Furthermore, even if the deposit is made in another bank and the balance in none of your individual bank accounts exceed 10, 000 USD but combined, it touches this specified amount, all of your accounts will be reported.

After declaring, consider finding out if you qualify for foreign-earned income exclusion. If you do, you can separate a portion — $105,900 — of your foreign-earned income and not have to pay tax on that amount.

Would you want to pay both the German and US governments tax on your income? We didn’t think you would, which is why you should see if you qualify for foreign tax credit.

Learn more about: 2020 US tax due dates and worldwide, country by country tax deadlines, tax year and extension. 

Moreover, you may either be eligible for foreign tax credit or foreign income exclusion. For example, you have to meet a certain test to claim foreign earned income test exclusion but not for foreign tax credit. And if you have already paid a foreign tax on your foreign income, you can claim a foreign tax credit. Remember that you cannot apply for both the foreign tax credit and foreign income exclusion at the same time. It depends on your unique situation to decide what is best for you. Choose wisely!

Finally, you can take advantage of the Foreign Housing Exclusion strategy. It allows you to remove certain amounts for your household expenses in Germany before you pay taxes.

Tax Due Date in Germany

In Germany Income Tax becomes due by May 31. The tax year for this country follows the same dates as that for the United States. You can file the taxes for both countries at the same time for your ease. However, don’t forget two things:

  1. You get an extension to December 31 if a tax professional prepares your tax returns
  2. Additional extension – up to February 28 of the subsequent year — is also available, provided you submit a written application

Failing to file your returns can incur a penalty up to 10% of the amount you pay in taxes to the German government. The good news is that the penalty cannot be higher than EUR 25,000. However, you tack 1% of the taxes as late fees and 0.5% interest on each month delay.

Learn more about: 2019 US tax due dates and worldwide, country by country tax deadlines, tax year and extension. 

The US-Germany Social Security Agreement

Your name enters the social security program the moment you begin earning your Salary in Germany. An exception exists for US expats who aren’t working for a company that isn’t based in Germany.

According to the contract between the two countries, you will pay the:

  1. US social security program if you will only be working for 5 years or less in Germany
  2. German social security if working for longer than five years
  3. German social security if you work for a non-US employer

Residency in Germany

US expatriates will become Germany residents if they intend to stay for longer than six months. In this case, provided your employer isn’t obligated to withhold your German taxes, you will file a restricted tax return.

To prove your status as a resident, you can also provide proof of residence within the country. In such a situation, your tax returns will be unrestricted.

While Living in Germany as an American, you will remain a tax resident. You can leave the country to change your status, regardless of whether you have German nationality or not.

Income Tax Rates in Germany

Germany Tax Rate is higher than the corresponding rates in the US. After the standard and allowable deductions, the remainder of your income is taxed at EUR 9,169 for one person — EUR 18,338 for couples filing jointly. In Germany, the first cap for income exceeding EUR 55,961 comes at 42%. The second threshold is EUR 265,327, at which the tax becomes 45%.

Other Taxes in Germany

While a wealth tax is absent, you may also have to pay the following taxes:

  • Your investment and capital gains tax will be deducted directly from your paycheck at a rate of 25%. You may deduct your losses or the price of assets that you sell
  • The inheritance tax may vary between 7%-50%
  • If you aren’t living on a property or have owned it for less than a decade, you will pay capital gains tax on real estate

Don’t leave the filing until the last moment because Germany doesn’t just have a high tax rate; it also levies high penalty – with interest – on each monthly delay! Additionally, you will also be filing returns for your home country. We’d recommend contacting us before the deadline comes closer!

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