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TAXES

EXPLAINED: The tax mistakes Americans in Germany should avoid

Spring means the start of tax season for Americans. And the looming US tax deadline can be the source of several headaches for the thousands living in Germany.

Published: 5 March 2024 16:45 CET
Updated: 9 March 2024 15:28 CET
EXPLAINED: The tax mistakes Americans in Germany should avoid
Filing taxes in two countries can be a headache for Americans based in Italy. Getty Images via AFP.

That’s because the U.S. is one of three countries that utilise citizenship-based taxation. American citizens are taxed on their worldwide income, regardless of what country they call home. 

The Local spoke with Kasia Strzelczyk, tax specialist at 1040 Abroad, an international tax firm headed up by a U.S. expat, to discuss some of the common mistakes American expats make during tax season. 

READ ALSO: ‘It led to divorce’: How US tax rules burden Americans in Germany

Failing to file US taxes

Moving to Germany does not exempt you from US tax obligations. Americans and US Green Card holders must file US taxes yearly regardless of residency because of America’s citizenship-based taxation law. Americans are required to file US taxes until death or they renounce citizenship. 

“Many American expats mistakenly believe they don’t need to file U.S. taxes if their income is below the Foreign Earned Income Exclusion (FEIE) threshold,” Strzelczyk said. 

While Americans abroad receive an automatic filing extension until June 15th, any taxes owed still need to be paid by the April 15th deadline, according to the IRS.

U.S. citizens and Green Card holders can exclude up to $120,000 of foreign-earned income in 2023. For married couples who both work abroad and file together, up to $240,000 can be excluded for the 2023 tax year. The FEIE threshold changes every year to keep up with inflation. 

READ ALSO: ‘So many hurdles’: How Americans in Germany are struggling to renounce US citizenship

Still, Strzelczyk said claiming the FEIE doesn’t automatically exclude all forms of income and can affect eligibility for certain deductions and credits. Reach out to a tax specialist to determine what would be best for your tax situation. 

Forgetting to file taxes in the US can result in hefty fines, but the IRS offers the streamlined foreign offshore procedure to help expats who haven’t filed in previous years catch up on their taxes. The IRS tax amnesty program pardons expats if their non-compliance is non-willful. If you do not owe any taxes to the U.S. you will not be subject to the failure to file or failure to pay penalties.

We get it, taxes can be a pain, especially for Americans abroad. Photo by Elisa Ventur on Unsplash

Not filing German taxes first

Once you’ve determined that you will pay taxes in Germany and the U.S. it’s also important to determine the most advantageous timing for filing. 

Strzelczyk said the order of filing taxes can be important for Americans living abroad. 

“When American expats are living in Germany, they should start by filing their German taxes,” she said. “This way, they can make sure to claim any deductions they’re eligible for. After finishing up with the German tax authorities, they can move on to their US taxes.”

US expats are required to declare their worldwide income on their US tax returns regardless of their country of residence. By completing German taxes first, Americans can lower their US tax bill with the Foreign Tax Credit which accounts for the taxes they already paid in Germany. 

Misunderstanding US-Germany Tax Treaty

The US-Germany tax treaty enacted in 1954 helps American expats and Germans living in the US avoid double taxation. 

It does not allow expats to skip filing taxes in either country. Instead, the treaty outlines how different types of income are taxed and by whom. To benefit from the treaty, expats must fill out the proper forms. 

This is a specialist area of tax law, so it is important to find a qualified tax adviser or accountant to ensure German and US tax laws are met. 

Not utilizing advantageous tax credits

Many expats are unaware of US tax credits they may be eligible for that can provide tax relief. A few examples of credits you may be eligible for include: Child Tax credit, Foreign Housing Exclusion and Child and Dependent Care Credit. 

Some American families can also benefit from tax credits even if they don’t pay US income taxes. The child tax credit is refundable, so families can get money back even if they have no taxes owed.

To be eligible for this tax credit, children born to at least one American parent abroad will need a Social Security Number (SSN). Parents will need to apply for a SSN at through the US Consulate in Frankfurt, a process which can take upwards of several months. 

And deductions are not limited to the US case. American expats can also utilize a standard lump sum deduction of €1,230 per year for work-related expenses to reduce their German tax burden. In some cases, the costs associated with maintaining two households for work reasons can also be tax deductible. Taxpayers with children can also use the childcare and children allowance and the child benefit. 

Not seeking help early

No two tax situations are the same. For Americans living and planning to retire abroad, it may be advantageous to meet regularly with a tax specialist or accountant to ensure you are in line with complex US and German tax laws. 

Member comments

  1. It may sometimes be necessary to file US taxes first and then amend later. We filed German taxes last year in September and they have not been processed by the Finanzamt as of 1 March. So this delays the start of tax filing German tax forms for 2023.
    When we filed US taxes last year, we used the tax calculated on the German formula. But when it is finally processed, we may need to amend last year’s US taxes.
    The impact? Even after getting the US tax due date extension, you might have to file without a processed German tax document.

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READER QUESTIONS

EXPLAINED: Do I have to declare income from foreign sources on my German tax return?

If you're a resident in Germany, you will typically have to declare and pay tax on your worldwide income. But there may be some exceptions in certain cases.

Published: 3 May 2024 11:11 CEST
EXPLAINED: Do I have to declare income from foreign sources on my German tax return?

If you’re filling in a German tax return, you are generally legally required to declare and pay tax on all income you earn – wherever in the world you earn it. This is true even if you keep the money abroad.

In most cases, your worldwide income is subject to what’s called “unlimited tax liability” – which means that there’s no exemptions or discounts on your taxes for money earned abroad – whether its from work or capital gains like the sale of stocks. This is generally even true if Germany doesn’t have a Double Taxation Agreement (DTA) with the other country in question.

If, however, Germany does have a DTA – some of your tax might end up getting limited in Germany. This is generally providing that you’ve paid it in the other country.

For example, the US may apply a withholding tax to payments made to you for freelance services you provide in the US, for example. In this case, the DTA between Germany and the US would allow you to submit documentation proving that you’ve already paid tax on this payment in the US. That’ll prevent you from having to pay tax again in Germany on the amount that actually gets wired to your account.

READER QUESTION: How can I find a German tax advisor?

Who has a double taxation treaty with Germany?

Germany has concluded double taxation agreements with numerous – but not all – countries and territories. You can check out the German government’s dropdown menu here to see which countries are on the list.

German residents earning money in other EU countries should still check this list, as certain tax provisions may be unique to the two countries in question.

READ ALSO: Everything you need to know about paying taxes in Germany

What about rental income?

As a general rule, rental income is taxed in the country where the property is located, meaning you don’t have to declare or pay it in Germany. There are some notable exceptions – for example if the property is located in Spain. In this case, you would report this income in Germany.

What about inheritance?

Some double taxation agreements have clauses that specifically govern what tax rules there are around inheritance that a German resident might get from abroad.

In general, the inheritor will still have to pay inheritance tax in Germany, but could see their tax liability reduced if tax already has to be paid abroad.

There are also other exceptions possible, such as if a child receives a property in their parent’s will and then proceeds to live in it for at least 10 years after they acquire it. In this case, they may not need to pay any tax on it.

In certain complicated cases – or if you have any doubt – it may be a good idea to seek out the services of a professional tax advisor who can make sure you don’t get in trouble with the Finanzamt (tax office). 

READ ALSO: Do foreigners owe tax in Germany on money that is inherited from overseas?

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