Germany is becoming a favored destination with many Americans opting to move and settle in this
county. Most prefer the buzzing cities of Hamburg, Munich or Berlin while some love the beautiful geography and culture and the quaint small towns like Rothenburg ob der Tauber, Augsburg or Monschau. Whatever your reasons are for moving, one of the first considerations to keep in mind is taxation.
As a U.S. citizen living in any part of the world, keep in mind that you’ll continue to pay taxes, both back home and in the new host country. This is a privilege U.S. citizens have, as they are among the only two countries in the world that tax based on citizenship rather than residency. While we will not discuss the morality or constitutionality of this, we must address practical questions about taxation. Keeping up with US expatriate taxes is critical or you could incur financial penalties when filing your U.S. taxes from Germany. Here are some of the typical mistakes expats make and how you can avoid them.
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Not Being Clear on Your Status as a German Resident
If you’re a tax resident of Germany, you’re liable to pay the applicable taxes in the country. These taxes can range from 15% to 35% depending on the total income you earn. Check the official site for information about getting resident status and to make sure that to keep up with your tax obligations. You’ll acquire the status of a resident if you’ve established a German location as your “center of vital interest.” Other conditions include:
- Performing your professional activities out of Germany
- Earning more than 50% of your global income during a single calendar year in Germany
- Living as a temporary resident in the country for four consecutive years
- Having immediate family living in Germany or getting married to a German national
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Not Taking Advantage of Double Taxation Provisions
The US government has several provisions to help expats avoid paying double taxation. By taking advantage of these strategies, you can minimize the taxes you must pay. For instance:
- The Foreign Earned Income Exclusion allows you to deduct a specific income level from your total income earned in Germany and pay US Expatriate taxes only on the balance amount. For the year 2020, this income level is fixed at $107,600. Since this figure changes each year, you’ll want to contact your tax consultant and ask about the updated regulations.
- The Foreign Housing Exclusion allows citizens to deduct any living expenses that they might incur from the taxable income. Complete and submit the Form 2555 to assess the Foreign Earned Income Exclusion and multiply this amount by 16%. The figure you get is the base amount above which you can claim living expenses deduction.
- The Foreign Tax Credit lowers the amount of taxes that you’re liable to pay on the income remaining after clearing your tax dues to the German government.
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Not Filing Foreign Bank Account Reporting (FBAR)
In addition to the regular income tax return, you must also file the Foreign Bank Account Reporting (FBAR) just as this article on CNBC describes. This information includes details of the assets that you hold in foreign bank accounts by way of the FinCen Form 114. Do keep in mind that any capital gains you earn from the sale of stock, real estate, securities, and any other assets are also taxable. For the purpose of US expatriate taxes, all the capital gains income you earn from any sources across the world must also be included in the FBAR.
In case you’re earning any non-cash compensations including the taxes that your employer pays to the government on your behalf, this amount must also be declared. While Germany does not levy any Inheritance Tax, any real estate gifts incur a tax that is payable by the recipient.
US expatriate taxes and regulations can be complex for anyone but neglecting them can be a very costly mistake.