Many Americans are moving to Germany every year, and numbers are increasing. However, moving abroad can affect your tax situation. Germany and Europe overall aren’t particularly famous for the low tax regime. Moreover, the tax systems of Germany and the USA differ significantly, so you as an American should inform yourself well on this topic.
Everyone who lives in Germany or stayed longer than 6 months in obligated to pay taxes there. As an US citizen your income is taxed in the US even if you live abroad.
Ultimately, as an American all your income in Germany will be subject to taxes, not only the income you earn in Germany. The USA is one of only two governments that tax the international income of its citizens and permanent residents with no regard of the place of residence.
American Living in Germany: Taxes
Yes, if you are an American living abroad as a US citizen, you must file a US federal tax return and pay US taxes no matter where you live at that time. In other words, you are subject to the same rules regarding income taxation as people living stateside.
What Types of Income Are Taxable?
Not all income is taxable, so it is in the US and in Germany, also the rules on what income is taxable are different.
In Germany income from following sources is taxable:
- Agriculture and forestry
- Business and trade
- Job or non-self-employment
- Capital assets – interests, dividends, price gains on share sales, etc.
- Renting and leasing
- Other income – gains from private transactions, alimony, annuities, pension agreements, but also maintenance payments
Some types of income are tax-exempt in Germany but are used to determine the tax rate, such as unemployment benefits, maternity leave payments, and certain income taxed in other countries due to double taxation treaties.
When living/residing in Germany for over 6 months per year, a person becomes a tax resident, and so all their worldwide income will be taxed at the German rate.
Income in US is defined as a form of money, property, or services. It can be income from wages, salaries, interest, dividends, business income, capital gains, and pensions received during a given tax year. Taxable in the US income includes:
- Employee Compensation
- Fringe benefits
- Business and Investment Income
- Royalties – copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income.
- Virtual Currencies
- Capital gains
Which Income is Tax-Free?
Luckily not all of the income is taxed in both countries and there are some ways to receive money tax free.
Following income isn’t taxed in Germany:
- Maternity, parenting, or parental allowance
- Child allowance
- Allowance for health, care, and statutory accident insurance
- Social allowances, unemployment benefit, and wage replacement benefits according to the Employment Promotion Act (Arbeitsförderungsgesetz)
- Housing allowance
- Student allowance (especially BAföG)
- Certain subsidies for occupational and private pension provision
- Additional allowances for Sunday, holiday, and night work
- Compensation for voluntary activities
In the US tax free income is slightly different. You can avoid paying taxes completely or partially from these sources:
- Partnership income
- S Corporation income
- Disability Insurance payments – overall disability benefits are taxable if the employer paid the premiums for the policy, but there are some exceptions.
- Payments from employer-provided Insurance
- Health savings accounts (HSAs) – distributions from a health savings account (HSA) are not taxable, but only if they are used for qualified expenses.
- Life insurance payouts
- Earned income in the particular states*1
- Corporate income earned in the particular states*2
- Sale of a principal residence
- Financial gifts
- Municipal bond interest
- Up to $3,000 of income offset by capital losses
- Roth retirement account income
*1 Taxes and their rate vary depending on the state. For instance, states like Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t income tax at all. Some states also exempt pension and social security income from taxation, although both are taxed on the federal level.
*2 You will be exempt from corporate income taxes in these states—Nevada, Ohio, Texas, Washington, South Dakota, and Wyoming.
How Can You Reduce Your Tax Burden as an American Living in Germany?
Luckily, Americans living in Germany don’t have to proceed double taxation, thanks these rules:
Foreign Earned Income Exclusion – This exclusion allows US citizens to decrease taxable income by the first $107,600 for 2020 earned as a result of their work in Germany (if you an employee).
Foreign Tax Credit – This credit allows US citizens to lower tax obligation on the remaining income by certain amounts paid to a foreign government.
Foreign Housing Exclusion – In most cases you will pay for the rent in Germany. This rule gives you an additional income exclusion for certain amounts paid for household expenses that occur in Germany.
Consequently, if US citizens move or are already living in Germany, they should learn about these exclusions to pay lower taxes. In that case, talking to the tax advisor is the best solution, you could find a professional for foreign tax law also in Germany, check this website and see the availability of the competent person.
Get your free online consultation with German lawyers and tax advisors in different areas of expertise. You can choose between two communication ways: email and phone. Call with the expert starts from 0,42 EUR per minute, instead of paying hundredths of euros for the meeting in person.
Taxes for Individuals
In this post, we will separate taxes for all individuals in Germany VS US and taxes for business&self-employed people.
Income Taxes Germany vs US
As an American living and working in Germany you will pay taxes on your worldwide income but have the opportunity to use Foreign Earned Income Exclusion (read above) to reduce tax.
As we know, all employees pay income tax, and it’s by far the most important tax for employees in Germany. Income taxes are deducted from your gross monthly paycheck automatically by the employer, so you don’t have to deal with this.
At the end of the year, you can claim some amount back by submitting a tax return, check more here. The income tax rate in Germany is generally between 14% and 45% of the own income, the rate is increasing with the increase in earnings.
Income taxation in Germany follows the “linear-progressive tariff” rule and can be a little complicated if you want to calculate the owned amount yourself. But luckily for US citizens, the German income tax system is similar to the American.
There is tax-free amount, where you don’t have to pay any taxes, whether you are employed or self-employed. For 2021 it is 9,744 EUR and from 2022 it will increase to 9,984 EUR.
The tax rate of 42% applies to taxable income above 57,051 EUR for 2020. For taxable income above 274,613 EUR, a 45% tax is applicable.
In the table, you can see the income brackets and applicable tax rates. However, in Germany, the income tax calculation is more complicated than you think. Thus taxes are calculated linear progressively, what means different percentage applies for a different amount, hence there is also rate of e.g 32% or 41%.
|Taxable income||Marginal tax rate in 2021|
|Up to 9,744 EUR||0%|
|9,744 EUR – 14,532 EUR|
14,533 EUR – 57,052 EUR
|14% rising progressively to 24% |
24% rising progressively to 42%
|Over 57,052 EUR||42 %|
|From 274,613 EUR||45 %|
For expats taking the advice of tax experts in Germany is highly recommended. The tax system is complicated enough to figure it out on your own. You could request free online consultation with German lawyers and tax advisors in different areas of expertise.
Similar to Germany, the US has a progressive tax system, meaning people with higher taxable incomes pay higher federal income tax rates. Tax rates in the U.S. range from 10% to 37%, thus in the US employees pay less taxes than in Germany.
In comparison to Germany, the US doesn’t have tax-free amounts, meaning you will pay taxes when earning any amount. The lowest rate of 10% applies for the income bracket from $0 to $9,875.
In the US the term Federal taxes is common, where there are 7 different tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Taxpayers should notice, that the brackets vary depending on whether they are single/married, if they fill taxes together with the spouse or separately, but also if only one spouse earns income or both.
The same way amount in taxes ranges in Germany, it called tax class. Depending on which life situation a person is in, they will be assigned a particular tax class where a different rate will apply. But again, the system is complicated and we won’t touch on all the details in this article.
The most beneficial for taxpayers class in Germany can be defined by your tax advisor (link), where they calculate how much each of the spouses earns and other factors.
Moreover, in the US you can reduce your tax rate by subtracting some deductions, which isn’t common in Germany. Such deductions include student loan interest payments, contributions to an IRA, moving expenses, and health insurance contributions for self-employed persons.
In Germany, these deductions don’t exist because usually, people don’t take so many loans, and in the US, and health care system is completely different.
Since tax rate is the same for any tax class in the US and the difference is only in the income thresholds, we will look only at taxes for a single individual. You can find the full information on brackets and tax rates in the US here. For single taxpayers following rates apply:
|Tax rate||Taxable income bracket||Tax owed|
|10%||$0 to $9,875||10% of taxable income|
|12%||$9,876 to $40,125||$987.50 plus 12% of the amount over $9,875|
|22%||$40,126 to $85,525||$4,617.50 plus 22% of the amount over $40,125|
|24%||$85,526 to $163,300||$14,605.50 plus 24% of the amount over $85,525|
|32%||$163,301 to $207,350||$33,271.50 plus 32% of the amount over $163,300|
|35%||$207,351 to $518,400||$47,367.50 plus 35% of the amount over $207,350|
|37%||$518,401 or more||$156,235 plus 37% of the amount over $518,400|
For most of the cases, e.g for married people who file taxes together the amount for income brackets simply doubles without actual change in the percentage.
How to calculate taxes in the US?
Luckily, the system of counting the owned amount is also identical to the German one, so it will be easier for an American to understand income taxes in Germany.
Let’s say you’re a single taxpayer in the US with $32,000 in taxable income, thus, in 2020 you will be in the 12% tax bracket. However, you don’t pay 12% on all $32,000, but 10% on the first $9,875, and 12% on the rest instead.
In addition to the income tax, you will pay social contributions to the different insurance you have. Social contributions are something employees are obligated to pay in Germany and in the US. For instance, American ex-pats will be enrolled in the German Social Security program as soon as their employment begins.
Nonetheless, this does not apply for expats who are working in Germany for a company located outside of the country. There is a special agreement between the 2 countries that describes to which country social security is payable for American expats who work in Germany.
With that said, if an employee is assigned to work in Germany by the US company for 5 or fewer years, he/she will continue to pay for social security in the US. Thus, if the contract is longer than 5 years or if expat is working for a non-US employer in Germany, he/she will pay for German social security.
In Germany, deducting social contributions is the job of the employer if you are an expat, but business owners and freelancers have to deal with it on their own. Social security in Germany includes:
- Pension insurance (Rentenversicherung) – 9,3%
- Unemployment insurance (Arbeitslosenversicherung) – 1,2%
- Public Health insurance (Krankenversicherung) – 7,3%
- Nursing insurance for disability and old age (Pflegeversicherung) – 1,525%
After you’ve worked as an employee in Germany for at least 12 months, you will be able to claim an unemployment benefit of 60% of your previous net salary for 1 year, known as Arbeitslosengeld I.
In Germany, these contributions are shared by the employer and employee equally. Above you can see the only percentage from the salary that employee is paying. This means the entire amount is double that, only half will be deducted from your gross salary.
You could also choose private health insurance, a premium of which won’t depend on your income, we recommend Ottonova as a provider. They made their policies especially for expats, freelancers, and business owners in Germany.
In the US social contributions exist as well and called payroll taxes. Most employees pay taxes throughout the year in the form of payroll taxes that are withheld from their paychecks. In the US similar to Germany employers and employees share obligations to pay for social contribution
Payroll taxes in the US include social security and medicare. These taxes are paid by both employers and employees, at a combined rate of 15.3%. Social Security tax applies only to the first $142,800 of wages in 2021, whereas Medicare is mandatory.
For Social Security, the tax rate is 6,20% for both employers and employees, which comes to 12,4% in total, nonetheless, the maximum withheld amount for that tax is $8,853.60 in 2021. The rate for Medicare is 1,45% for both employers and employees (2,9% in total).
There is an additional Medicare tax of 0,9% on wages above $200,000. In some cases, there can be deductions for disability insurance 1,8% and employment insurance 0,6%.
Taxes on Foreign Income
For anyone who is considered a tax resident of Germany, worldwide income is taxable. Despite that, Germany does have tax treaties with many countries, so double taxation can be avoided.
Thus, if a resident earns income outside of Germany, they will need to review the tax treaty agreement between Germany and this country or talk to a tax expert.
US citizens are taxed by their citizenship already, so they will pay taxes on all their income to the US, whether this income is earned abroad or not. Thus, worldwide income is always taxed.
Investments are taxed in both countries because an investor receives income from them. In Germany, interests, dividends, and capital gains on stocks are subject to a flat tax of 25% plus a solidarity charge of 5,5%.
In the US, long-term capital gains and qualified dividends are generally taxed at tax rates of 0%, 15%, and 20% depending on your taxable income. However, certain types of capital gains may be taxed as high as 25% or 28%.
The process of calculating the tax on long-term capital gains and dividends can be complicated in the US. It depends on the amount of the net capital gains and qualified dividends as well as the taxable income of the individual.
There are some rules and exclusions for particular dividends (e.g from money market mutual funds), which are treated as ordinary income, thus taxed by income tax. Additionally, interests and rents are taxed together with the overall income too.
Estate or Inheritance Tax
In Germany, estate or inheritance tax known as Erbschaftsteuer. It is the tax on the receipt of assets/inheritance due to death. Generally speaking, German inheritance tax rates range from 17% to 50%, depending on the relationship to the decedent.
There are some main exceptions to that tax:
- Household goods have a lower value of 41,000 EUR and receipt is in the tax class I
- Normal occasional gifts are excluded
Exempt amounts for inheritance tax in Germany
Every recipient with unlimited tax liability in Germany is entitled to a personal tax-free amount, which applies both to the inheritance and also to gifts among living persons. The exempt amounts are:
- For the spouse/partner: 500,000 EUR
- For each child/stepchild: 400,000 EUR
- For each child of a deceased child/stepchild: 400,000 EUR
- For each child of a living child/stepchild: 200,000 EUR
- For all other persons in tax class I: 100,000 EUR
- For all persons in tax class II and III: 20,000 EUR
Generally speaking, amounts less than 500k are tax-free, with that said most people don’t pay inheritance taxes in Germany. And if they do, the tax rate varies from 7% to 30% for inheritance between 70,000 and 6,000,000 EUR over the tax-free value.
In the US, the federal estate tax, also known as the inheritance tax, is primarily paid by the multi-millionaires and billionaires. Thus in comparison to Germany owner of heritage is responsible for this tax instead of the recipient.
This is definitely not a tax the middle class should worry about in the US. In fact, the vast majority of estates – around 99, 9% don’t pay federal estate taxes.
While the maximum estate tax rate is 40%, the average rate paid is just 17%. In the US, the estate tax is only paid on assets greater than $5.3 million per individual or $10.6 million for a couple.
Real Estate or Property Taxes
In Germany, the government-regulated property tax ranges between 3.5% up to 6,5% of the purchase price and must be paid by the buyer after the signing of the contract. The amount is also varies depending on the state.
The real estate tax system in Germany has different elements to it. Firstly, a buyer pays a property transfer tax, called Grunderwerbsteuer. The tax rate is calculated as a percentage of the sale price and varies from state to state.
For example, in Berlin, the property transfer tax rate is 6%. In other states, the tax rate varies between 2,5% and 6,5% of the property value.
Additionally, homeowners pay real property tax – it’s a mandatory annual municipal tax. The amount is calculated by multiplying the assessed value of the property with the real property tax rate and the municipal multiplier. On average real property tax varies between 0,26% and 1% of the value.
In the US, property taxes are imposed by most states and are based on the fair market value of the property. Property tax varies widely with average rates ranging from 0,18% to 1,89% of a property’s value depending on the state.
VAT or Sales Tax
Sales tax is called VAT in Germany, which translates to value-added tax. When you buy products or services in Germany they will VAT taxes included in the price. For most goods, it’s 19%, for some necessities like groceries or books it’s 7%.
VAT is imposed in around 170 countries, although not in the US. States have sales taxes instead which are charged only from the end-consumer or buyer. The tax rate varies by state, ranging from 2,9% to 7,25%.
In addition to the state rate, local governments in 35 states imposed an additional sales or use tax ranging from 1% to 5%. However, various states have reduced or zero rates on certain types of goods, such as food, residential utilities, and manufacturing-related machinery.
Taxes for Businesses, Self-Employed and Freelancers
Which taxes will you pay as a business entity, self-employed or freelancer in Germany vs US?
VAT or Sales Tax
19% of all sales made in Germany are subject to taxes. For example, when an entrepreneur/company/freelancer receives services/products from other companies, they must pay 19% in addition to the price. However, when they sell received goods to the customer, they get that 19% back from the state.
The tax applied on the final sale of a product or service in the US is called a Sales Tax, they exist in most of the states and some localities.
Rates vary among jurisdictions, from 0% to 16%, and may vary within a jurisdiction based on the particular goods or services taxed. Sales tax is collected by the seller at the time of sale.
We strongly recommend to do all your taxes with Sorted. Sorted operates as an online platform and manages your invoices, expenses & income, and submits all papers to the tax office.
Business Tax or Trade Tax
In Germany, all businesses must pay a business tax. Only freelancers such as lawyers or doctors and agricultural& forestry enterprises are excluded.
The business tax rate depends on the location of the business registration. Moreover, if the profit of the company doesn’t exceed 24,500 EUR, it will be exempt from taxation.
This taxable profit above 24,500 EUR is multiplied by a base rate determined by the state, which is currently at 3,5%. The resulted number then multiplied by another rate – municipal tax rate. So the process of calculating business taxes in Germany can get complicated.
Example calculation: a company makes a profit of 30,000 EUR, after deducting a tax-free amount of 24,500 EUR, they will pay tax on 5,500 EUR. After 5,500 EUR will be multiplied by the base rate of 3,5%. The resulting 192,50 EUR is then multiplied with the municipal tax rate which differs widely, but the common one will bring 770 EUR in business tax.
There is no business/trade tax in the US.
Corporate Income Tax
Corporate tax of 15% must be paid by each company in Germany.
Corporate income tax rate is 21% in the US.
Capital Gains Tax
Capital gains tax in Germany is applied to gross profit from capital investments such as interests, dividends from corporations as well as open and hidden distributions of company’s profit. Since 2009, private investors also have to pay this tax in certain cases, e.g. sale of shares.
In the US capital gain tax strongly depend on the income of the person (higher rates apply to higher incomes) and also whether they are married, etc. (same way as with federal taxes).
There are 3 different rates for capital gain tax: 0%, 15%, and 20%. However, most of the people will pay 15% because it includes an income bracket of $40,000 up to $441, 450 for a single person.
Additional Taxes in Germany
In addition to all taxes we have listed, Germany has some special taxes, which are more typical for European countries.
In Germany, church tax is applied to registered members of an official church in your municipality. The tax rate varies and usually comes to 8-9% of an individual’s income tax. So going to the church in Germany is pretty damn expensive.
All taxpayers in Germany are also subject to a solidarity surcharge of 5.5% on tax payments exceeding 972 EUR. HOWEVER, from 2021, 90% of the people in Germany will be excluded from this tax, only 6,5% of top earners will continue to contribute.
Tax Due Dates
In Germany, taxes have to be filed by June 31 of the year following the tax year. You will receive an automatic extension to December 31 if taxes are prepared by a tax professional.
To make your taxes easier in Germany, we recommend using Sorted. They will guide you through adding your income and expenses and automatically prepare all your tax reports as a freelancer or small business owner. You can review and submit them online to the tax office (Finanzamt) with just a click.
In the US companies must fill taxes on until May 17, 2021.
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