US citizens in Germany: living with two tax systems at once

Two systems, one income

Germany taxes you as a resident from the day you establish a home or habitual abode here – typically the day of your Anmeldung. Your German return covers salary, investment income, rental income and anything else, worldwide, at rates up to 45 % plus surcharge. Your US return (Form 1040) covers the same income under US rules, with the foreign earned income exclusion, the foreign tax credit (Form 1116) and the treaty available to neutralise German tax already paid. Because German rates are generally higher than US rates on earned income, most Americans in Germany end up owing little or nothing to the IRS on their salary – but they still file, and the filing has to be right.

Where the systems fit

• Employment income. Taxed in Germany where the work is performed. In the US, excluded up to the annual limit under the foreign earned income exclusion (around 130,000 $, indexed) or credited via Form 1116. Excess German tax can be carried forward as credit for ten years.

• German social security. Under the US–German totalisation agreement you pay into one system, not both. German pension contributions are not deductible for US purposes; the later pension is taxable in both countries with treaty coordination.

• Investment income. Germany taxes interest, dividends and gains at a flat 25 % plus surcharge (or your progressive rate on election). The US taxes them at its rates with a credit for German tax. Dividends from US companies received in Germany: US withholding limited to 15 % under the treaty, credited in Germany.

• Property. Rental income from German property is taxed in Germany first; the US taxes it too, with a credit. Depreciation rules differ – Germany 2–3 % straight-line on the building, the US 27.5 years for residential rental property – so the two taxable results never match. On sale, Germany’s ten-year exemption does not exist in the US: a gain that is tax-free in Germany is fully taxable in the US, with no German tax to credit.

Where they do not fit: the pitfalls

German investment funds and ETFs

From the US perspective, German and European mutual funds and ETFs are passive foreign investment companies (PFICs). PFIC taxation in the US is punitive and the reporting (Form 8621, per fund, per year) is laborious. Many Americans in Germany hold German funds through a bank or a company pension plan without knowing this. The fix is usually to hold US-domiciled ETFs instead – if a German broker will sell them to you, which since the EU’s PRIIPs rules is not straightforward – or to accept the reporting. This is a decision to make before investing, not after.

Retirement accounts

German company pensions (betriebliche Altersversorgung), Riester and Rürup contracts have no US equivalent and no automatic US recognition; contributions may be taxable in the US when made, and the accounts may be reportable. Conversely, US 401(k) and IRA accounts are recognised in Germany under the treaty during the accumulation phase, but distributions – including Roth IRA withdrawals that are tax-free in the US – may be taxable in Germany. Which account to fund while in Germany, and when to draw from which, is a cross-border decision.

Foreign account reporting

US persons with foreign financial accounts totalling more than 10,000 $ at any point in the year file an FBAR (FinCEN Form 114). Higher thresholds apply for Form 8938 under FATCA. Every German bank, brokerage and many pension accounts count. The penalties for non-filing are disproportionate to the tax at stake, and German banks report American clients to the IRS under FATCA – the IRS knows the accounts exist.

Self-employment and company ownership

An American who is self-employed in Germany owes German income tax and, under the totalisation agreement, German social contributions – but must check US self-employment tax exemption via a certificate of coverage. An American who owns a German GmbH faces US controlled foreign corporation rules (Form 5471, GILTI) on top of German corporate tax. These structures need both advisors at the table before they are set up.

Marriage and filing status

Married to a non-American? In Germany you file jointly and benefit from splitting. In the US you likely file as married filing separately – or elect to treat your spouse as a US resident, pulling their income into the US system. The German joint return and the US separate return use different income figures; the credits must be allocated accordingly.

Inheritance and estate: the treaty that actually exists

The US and Germany are among the few pairs of countries with an inheritance and estate tax treaty (1980, protocol 1998). It allocates taxing rights, provides credits and – unusually – grants a German-resident US citizen a proportional share of the US estate tax exemption. Practically: an American in Frankfurt who inherits from parents in the US is fully taxable in Germany on the worldwide inheritance, with a 400,000 € allowance per parent, credit for any US estate tax actually paid, and the treaty rules on situs. Because the US exemption is high and most US estates pay no federal estate tax, there is often nothing to credit and the German tax stands. Gifts from US parents to a child in Germany follow the same logic – notification within three months to the German tax office included. Details on the page Inheritance & gift tax for internationals.

Leaving Germany, renouncing the US?

Americans who leave Germany face the German exit tax if they hold shareholdings of 1 % or more or large fund positions – see Leaving Germany & exit tax. Americans who consider giving up US citizenship face the US expatriation tax under section 877A, an entirely separate regime. Doing both in the same period requires coordinated planning.

What a German Steuerberater does – and what your CPA does

We are German tax advisors. We prepare your German returns, deal with the Finanzamt, structure your German affairs and provide the German-side numbers your US preparer needs: income by category, German tax paid and when, treaty positions taken. We do not prepare US returns – that requires a US-licensed preparer with expat experience, and we coordinate with yours. What we offer is the German half done in a way that makes the US half easier: consistent categorisation, timing of German payments to fit the US credit year, and no German investments that create US problems you did not know about.

Steuerberater Florian Enders and the tes tax team advise Americans in the Frankfurt area and across Germany, remotely, in English. Legal questions – a German will, a company formation, a property purchase – are handled by the lawyers of tes legal in the same firm.

Note: This page provides general information on German tax law. A binding assessment of your situation is only possible after engagement and review of your documents. We quote our fees in the initial consultation, before you commit.