Germany Specific

Questions covered:

German Income Reporting

How do I report income on the tax questionnaire?

For income you earned while being employed:

The primary source of information is Anlage N. If you had employee income from sources outside of Germany you will also need Anlage AUS to add numbers from the respective fields.

Report amount from line 6 (Bruttoarbeitslohn) on line  Gross wages/salary earned with this employer duting the tax year question in the Income > Wages > Income Outside of the U.S. section.

For income earned from self-employment

Income from self-employment is a turnover of your unincorporated business. You will need German forms  Anlage S or Anlage G.  Report it on the Gross Income from Self-employment question of the Income > Self-employment tab. 

Each type of income is reported as a gross amount, before any deductions allowed in Germany (i.e. before contributions to German Public Retirement System).  - those are reported separately.

Severance pay (Abfindung)

If you received severance pay as a compensation for termination of employment, add gross amount as additional wages.

How do I report taxes paid on the tax questionnaire?

Similarly to income, the tax also has to be reported separately for each type of income on which tax was paid.  Add the amounts printed on line 7 Income Tax ( ohnsteuer) line 8 (Solidaritätszuschlag). Enter results  on line  Amount of foreign tax paid on earnings (wages, bonus) of the Taxes & Deductions > Taxes Paid section of Tax Questionnaire.

If there was additional tax payment during the calendar year (i.e. Bundeszentralamt für Steuern issued tax bill for tax underpaid in the prior year), add that amount to the amount of tax withheld during the filing year.

Taxes on unearned income may be withheld by the payor (i.e. bank withheld income from dividends) or you may owe tax upon completion of tax assessment form. Report each type of tax paid during the filing year in the respective section, even if it applied to income received in prior years.

Do not combine and report separately property tax in the  Deductions section and stamp duty in the Home Sale section.

How do I report my deductions?

We will take specific deductions allowed for German residents by the US/German treaty (i.e. we can deduct contributions made to employer pension scheme). You will report contributions to employer pension separately from the gross income and we will take this deduction if this improves your tax position (in some cases you may benefit from not taking this deduction now).

Further, the  Taxes & Deductions > Deductions section of TQ offers you questions related to various additional deductions. Examples of such deductions are mortgage interest, alimony payments, investment advisor fees. Similarly to personal allowances in Germany, the US tax system also applies a concept of “Standard deduction”: $6,350 per single person and $12,700 for the married couple for 2017 tax year. For most German residents filing US tax return standard deduction option is more tax efficient than “itemized deductions” - grossing up individual deductions.

How do I report pension contributions?

Report employer contributions and your own contributions to employer pension scheme on the  Income > Wages > Income Outside of the U.S. tab.

How do I report pension payouts?

Report payouts from the foreign pension of all types: Social Security, employer pension, Widow's Pension in  Income > Passive Income > Pension section.

My taxes are taken out of my German salary automatically. I also have a deduction taken out for the German Social Security system. Do I add these together for my income tax?

Social Security payment is not deductible from your salary. Likewise, you do not “deduct” income tax - we need to report gross salary and then take the foreign tax credit for income tax (not for the Social Security tax).

Other examples of non-deductible taxes are Church tax and VAT.

I receive Kindergeld. How do I report this?

This does not need to be reported - it is not treated as income.

German Pension Accounts

Social Security in Germany (Rentenversicherung)

Contributions to the German Public Retirement System withheld from your paycheck or made on self-employment income are not deductible from the U.S. taxable income and do not qualify for the foreign earned income credit.

You can check your record of the German Public Retirement System account online.

US - Germany Social Security Totalization Agreement

An agreement between the United States and the Federal Republic of Germany improves Social Security protection for people who work or have worked in both countries. It helps people who, without the agreement, would not be eligible for retirement, disability or survivors benefits under the Social Security system of one or both countries. It also helps many people who would otherwise have to pay Social Security taxes to both countries on the same earnings.

The provisions of the agreement eliminate double Social Security taxation and permit dual residents to use their work in both countries to qualify for benefits.

If you are self-employed

Contributions to German Public Retirement System make you exempt from contributions to the U.S. Social Security system that otherwise would be required in the US on self-employment income.

How it impacts those who want to earn US Social Security credits

If you have Social Security credits in both the United States and Germany, you may be eligible for benefits from one or both countries. If you meet all the basic requirements under one country's system, you will get a regular benefit from that country. If you do not have enough work credits under the US system to qualify for regular benefits, you may be able to qualify for a partial benefit from the United States based on both US and German credits. To be eligible to have your German credits counted, you must have earned at least six credits under the US system.  To be eligible to have your US credits counted towards German benefits you must have a minimum period of coverage in Germany totaling 18 months.

Although the agreement allows the Social Security Administration to qualify for US retirement, disability or survivor benefits, the agreement doesn’t cover Medicare benefits.

Taxation of Social Security Benefits

US Social Security Benefits

US Social Security benefits received by US citizens and green card holders residing in Germany are exempt from tax in the United States and are taxable only in Germany.

German State Pension

German State Pension and other payments received under the German Public Retirement system legislation by US citizens and green card holders residing in Germany are taxable in both countries.

The foreign tax credit can be applied to eliminate double taxation.

Contributions to Employer Pension Schemes

When a U.S. citizen/green card holder is a participant in an employer pension scheme established in Germany:

  • Contributions paid by or on behalf of that individual to the pension scheme may be excludable in computing his U.S. taxable income

and

  • Any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer is not treated as part of the employee’s taxable income

However -  exclusion of contributions to the pension scheme is not mandatory. You may report those contributions on our Tax Questionnaire (Income > Wages > Income Outside of the U.S. tab, question - Did your employer contribute to your pension plan? to have it added to your annual taxable income.

Considering the high tax rate paid in Germany on earned income, added employer contributions may still leave you tax-free in the U.S. Your benefit: the added amount will be considered previously taxed - which will reduce the taxable portion of pension payments in the future.

Taxation of German Pension Benefits

Pensions and other similar remunerations paid to US citizen/green card holder residing in Germany are taxable in both countries.

However, you can eliminate the burden of double taxation. Taxes paid in Germany on pension income are applied as a foreign tax credit against tax owed on the same income in the US.

Tie-Breaker Rule to Apply Treaty Benefits

U.S. green card holders residing in Germany may elect to apply what is known as the  tie-breaker rule of the US/Germany Tax Treaty and be deemed a resident only of the State (i.e. country) with which their personal and economic relations are closer (Germany).

Under such an election, the individual would file form 1040NR and report only income derived from US sources. The requirement to provide full disclosure of foreign bank accounts remains and tax on income from US sources will be higher than a tax on the same income when applied to US residents filing form 1040.

German Businesses & Investments

Opening a local business in Germany as a US citizen

Of course, before opening a local business in Germany, you will likely need to obtain a visa or work permit in order to legally reside and work in Germany. What’s more, you must decide on your business structure and register your business with the appropriate German agency. There are several German agencies in which you may need to register your business such as the local offices of Business and Standards, the local Labour Office, the trade office (Gewerbeamt), the tax office (Finanzamt), etc. You can find out more detail on the appropriate office for your region provided on Germany’s Federal Ministry for Economic Affairs and Energy website.

What types of local business structures are there in Germany, and what would be the US filing requirement?

Sole Trader

As a Sole Trader, you are self-employed. You will need to report your self-employment to the IRS via form Schedule C.

Limited liability company (GmbH)

A limited liability company (Gesellschaft mit beschränkter Haftung or GmbH) means that the business is considered a separate entity from the individuals who form it. You will need to report your Limited Liability company to the IRS via Form 5471.

Corporation (AG)

A corporation (Aktiengesellschaft or AG)  also has limited liability, but (in Germany) requires at least five people to form and requires a high initial investment amount. You will need to report your corporation to the IRS via Form 5471.

Partnership (OHG or KG)

In Germany, the partnership model can be a Offene Handelsgesellschaft (OHG) in which the partners are responsible for all the liabilities of the company, or a  Limited Partnership (Kommanditgesellschaft, KG) comprised of general partners with unlimited liability and limited partners whose liability is limited to the amount of their contributions. You will need to report your partnership to the IRS via Form 8865

Germany - US FATCA Treaty Overview

The Protocol signed at Berlin on June 1, 2006, amended Article 26 of the Tax Treaty between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes. The amendment authorizes the exchange of information for tax purposes, including on an automatic basis. Such automated exchange of information was enacted through the Foreign Account Tax Compliance Act (FATCA), a piece of legislation introduced by the United States government in 2010, to help counter US tax evasion.

In Germany, the principles of FATCA have been brought into the local law. This means that German financial institutions need to provide information on US accounts to the German tax authorities (Bundeszentralamt für Steuern). Further, it becomes a subject to the Intergovernmental Automatic Exchange of information.

When did German banks start sending data on the US account holders?

The main requirements of the US and Germany Intergovernmental Agreement came into effect on 31 May of 2013.

German banks were required to extract account balances at 30 June 2014 and undertake checks depending on the value of the account. Higher value accounts (balances over $1m) were reviewed by 30 June 2015 and lower value accounts ($50k - $1m for individuals and $250k - $1m for entities) will need to be reviewed by 30 June 2016.

What searches do a German bank have to do to comply with US FATCA?

Financial institutions must search their data to identify financial accounts held by US Specified Persons, or by foreign entities in which US taxpayers hold a substantial ownership interest.

In order to achieve this, financial institutions need to search their data looking for any one of seven indications (indicia) that an account holder may be a US person. These indicia are:

  • US citizen (check for US passport or green card).
  • US residential address
  • Place of birth in the US
  • US telephone number
  • Standing instructions to send funds to a US bank account
  • Power of attorney (PoA) or third party authority in favor of a person with a US address
  • Use of a c/o or hold mail address

Which types of German financial accounts must/are not required to be reported on FBAR / FATCA?

Account types that must be reported

  • Individual bank accounts such as savings accounts, checking accounts, and time deposits
  • Retirement accounts
  • Brokerage accounts, commodity futures or options accounts
  • Insurance policies and annuity contracts with a cash value
  • Business accounts where US person has a greater than 50 percent interest in the entity

Account types that are not required to be reported

Even though FATCA will provide relief in reporting scope to many German retirement plans and certain collective investment vehicles that are considered “deemed compliant”, the FATCA rules applying to individuals were not relaxed. Form 8938 specifically requires reporting by U.S. taxpayers who participate in foreign pension plans.

German Income Reporting

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