US Expats Living and Working in Germany
US expats in Germany, who number in the tens of thousands, can cite many reasons for choosing Germany as their home. Reasons include universal healthcare, shorter working hours, a stable economy, and strong education system.
These and other attributes have made Germany the fourth most popular country to move to, according to HSBC’s 2020 Expat Explorer Survey (it earned eighth place in 2019).
For US expats in Germany, it’s important to understand the US tax ramifications. In this blog, we offer 5 basic tips for US citizens working in Germany, which elaborate on the obligation to file annually with the IRS, as well as other key insights.
Tip #1 – The Tax Obligations of US Expats in Germany Endure
Often, expats mistakenly believe that moving abroad means that their US tax obligations end. This is not correct. The first and most basic expat tax rule is as follows - US citizens, even those residing outside the United States, are considered to be US residents for tax purposes and are therefore subject to US tax reporting on their worldwide income.
As such, US expats in Germany must annually report all of their income to the IRS, whether the income is US sourced or Germany sourced, or sourced to any other country.
Tip #2 – Information Reporting to the IRS
US expats in Germany who hold accounts or other assets overseas are subject to a number of specific filing requirements in the form of informational forms. Some of these forms are submitted to the IRS as attachments to the personal income tax return (Form 1040), while others are submitted to other governmental departments, including the US Treasury Department. The failure to file any of these forms can result in large penalties, such as a $10,000 penalty per form per year, or even have criminal consequences, if fraud is involved.
Some of the more common forms include:
Foreign Bank and Financial Account Report (FBAR)
Form 8938, Statement of Specified Foreign Financial Assets (FATCA Reporting)
Form 3520, Foreign Trusts and Gifts
Form 5471, Foreign Corporation Ownership Reporting
Tip #3 – Due Dates Coincide Favorably
Fortunately for US expats living in Germany, both the US and Germany use the calendar year (ending December 31) as the tax year for individuals. This makes filing much easier in terms of timing and income matching.
While taxes for expats are generally due June 15, taxes in Germany must be filed by May 31, a relatively close due date.
In Germany, there is an automatic extension to December 31 if the return is prepared by a tax professional. This also nearly coincides with the discretional extension to December 15 given to US citizens living abroad.
Tip #4 – US Tax Benefits Are Available to US Expats in Germany
The good news for US expats in Germany is that both US domestic tax law and US-Germany bilateral agreements contain a number of provisions that are designed to prevent “double taxation,” or taxation on the same income in both countries. These include the foreign earned income exclusion (“FEIE”), foreign housing exclusion (“FHE”), and foreign tax credit (“FTC”).
With regards to the foreign tax credit, Germany has a progressive tax rate that currently ranges from 14% to 42% (in addition, a “rich tax” applies to income above a €270,501 threshold). These relatively high rates (relative to US tax rates) mean that it’s often the case that US citizens living and working in Germany will have no residual US tax to pay on their income.
These provisions, in many cases, can reduce or even eliminate the US federal income tax that would otherwise be due by the expat taxpayer. Keep in mind, however, that even if no US tax is owed, a US tax return still generally must be filed and the failure to do so can result in severe penalties.
Tip #5 – FATCA Has Expanded the Reach of the IRS
FATCA stands for the “Foreign Account Tax Compliance Act.” FATCA is designed to combat offshore tax evasion by requiring US citizens to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS. As part of the implementation of FATCA, the IRS requires certain US citizens to report (on Form 8938) the total value of their “foreign financial assets.”
In order to further enforce FATCA reporting, foreign banks are required under FATCA to report the balances in the accounts held by customers who are US citizens. To date, we have seen several large foreign banks require that all US citizens who maintain accounts with them provide a Form W-9 (declaring their status as US citizens) and sign a waiver of confidentiality agreement whereby they allow the bank to provide information about their account to the IRS. In some cases, foreign banks have closed the accounts of US expats who refuse to cooperate with these requests.
If you are a US expat living in Germany, it is essential that you remain compliant with your continuing US tax obligations.
Our experts at Expat Tax Professionals are available to help you understand your US tax filing requirements and to assist you with all of your US tax compliance needs.
