Read news from:
Austria
SHARE
COPY LINK
For members

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.

Log in here to leave a comment.
Become a Member to leave a comment.
For members

TAXES

EXPLAINED: How do you close down a freelance business in Germany?

Leaving the country? Got a steady job offer you can’t say no to? Winding down your self-employment activities in Germany still requires taking a few bureaucratic steps.

Published: 15 May 2024 09:07 CEST
Updated: 15 May 2024 10:57 CEST
EXPLAINED: How do you close down a freelance business in Germany?

Striking out on your own as self-employed is one of the scariest – and potentially most rewarding things – you can do. In Germany, it also comes with its own set of rules around tax and social insurance.

But there are times when – for whatever reason – it may be time to move on.

Whether it’s because you have an exciting new opportunity or things haven’t quite worked out the way you hoped due to economic pressures – winding down self-employment the right way is crucial to avoid gaps in your health and social insurance coverage in Germany.

The steps you have to take are also a bit different depending on if you are new self-employed (Freiberufler) or have a trade licence (Gewerbe) – with some steps not being necessary for new self-employed.

Trade licences are automatically cancelled if the licenced person dies or the company ceases to have financial assets.

Resigning the trade licence or declaring it dormant

New self-employed people like writers or speakers don’t need to go through this step, as they don’t need a trade licence.

Those who have a trade licence will need to contact their competent local authority and resign it, or declare it dormant (withdrawing the licence). If you’re only winding down temporarily, declaring your trade licence dormant instead of de-registering completely may save you a few headaches later.

You may have to do this in person at your local trade office – or Gewerbeamt – depending on whether your local authority allows online de-registration or not. You’ll need to bring your official ID, trade licence, confirmation of registration and possibly an extract from the trade register. Fees are dependent on your local authority and can range from being free to €25.

You can declare the date you intend to resign the licence – which can be in the future. To ensure no gaps in your social insurance protections, including health insurance, set this date for the day before whatever comes next. For example, if you’re starting a new job on January 1st set the date for your trade licence to expire as December 31st.

The trade office will typically notify your local tax office, so you won’t need to do this yourself.

Notifying your tax office

If you’ve had to resign your trade licence, you can skip this step as your trade office will do it for you. If you’re a Freiberufler without a trade licence you need to resign, you’ll have to notify your local Finanzamt, or tax office, yourself.

Luckily, this is a pretty easy step.

First, you need to decide whether you’re ceasing operations completely or wanting to continue them part-time. If you’re ceasing completely, you’ll end up surrendering your self-employed tax number.

You don’t have to do this though. If you think you may still carry on some self-employed business as a side gig, you can inform the tax office that you intend to do so and keep your number.

At that point, the tax office should treat you as a Kleinunternehmer – or a small business making less than €22,000 a year. Having this status means that you will not need to pre-pay taxes or charge VAT on your invoices for freelance side projects.

If you derive any income from your side gig in the future though, you’ll still have to file a tax return.

READ ALSO: Can I have a freelance side gig as an employee in Germany?

Notifying your health insurance

While different private plans in Germany may have different notification requirements, if you have public health insurance in Germany, you should notify them that you’re winding up your self-employed business. Specifically, advise them exactly what date you’re wrapping up.

Again, this should be right before you start your new job or leave the country, to ensure no gaps in your coverage.

If ending your self-employment in Germany, take care to ensure that there’s no gaps in your health insurance coverage, by giving the right date for when you’re ceasing activity. You don’t want to be caught without coverage. Photo by Stephen Andrews on Unsplash

If you are in an artistic profession and thus pay pension, health, and nursing insurance through the Artist Social Insurance Fund (KSK), you should also advise them as well. If you’re leaving self-employment completely, you can typically give notice to KSK as to when it’s ending.

If you’re not, and intend to still make money freelancing as a side gig, they should know this as well. In this event, you’ll no longer pay health or care insurance through KSK, as this is covered through your main job.

You may need to continue to pay pension contributions through KSK based on the amount of money you still make from self-employed activities — depending on how much of them you continue.

KSK: How creative freelancers can pay less for German health insurance

SHOW COMMENTS