German Tax for U.S. Citizens residing in Germany

German Tax for U.S. Citizens Residing in Germany

U.S. citizens who move to Germany face a dual tax environment: German tax obligations due to residence and continuing U.S. worldwide taxation based on citizenship. Understanding how German law and the Germany–U.S. Double Taxation Agreement (DTA) interact is crucial. This article provides an overview of German rules, DTA coordination, and practical examples.

1) Unlimited Tax Liability in Germany

Once a U.S. citizen establishes a residence (Wohnsitz) or habitual abode (gewöhnlicher Aufenthalt) in Germany, they become subject to unlimited tax liability (unbeschränkte Steuerpflicht) under §1 of the German Income Tax Act (EStG). This means:

Germany taxes worldwide income, regardless of where it arises.
All income categories under German law must be declared.
Tax rates are progressive, up to 45% plus solidarity surcharge and potential church tax.

2) Income Categories Taxable in Germany

German tax law distinguishes seven categories of income. For U.S. citizens in Germany, common sources include:

Employment income (salaries, bonuses, stock options).
Self-employment / business income.
Rental income from German or foreign properties.
Capital income such as dividends, interest, and capital gains.
Pensions (U.S. Social Security, 401(k), German pensions).

All of these must be declared in the annual German income tax return (Einkommensteuererklärung).

3) Interaction with U.S. Taxation

Unlike most countries, the U.S. taxes its citizens on worldwide income even if they reside abroad. Therefore, U.S. citizens in Germany remain fully subject to IRS filing requirements. Without relief, this leads to potential double taxation.

4) Double Taxation Agreement (DTA) Coordination

The Germany–U.S. DTA allocates taxing rights and prevents double taxation through:

Primary taxing rights: e.g., employment income is usually taxed where work is performed (Germany).
Exclusive rights: certain pensions and real estate income are taxable only in the source country.
Relief in the U.S.: U.S. citizens generally use the foreign tax credit (FTC) to offset German taxes against U.S. liabilities.

However, the “savings clause” in the treaty allows the U.S. to tax its citizens as if the treaty did not exist, with limited exceptions (e.g., government service pensions, Social Security benefits).

5) Practical Examples

Example A: Employment in Germany

A U.S. citizen works in Munich for a German employer.
Salary is taxed in Germany via payroll withholding (Lohnsteuer).
Income must also be declared on the U.S. tax return.
The U.S. taxpayer can claim FTC for German income tax paid or potentially use the Foreign Earned Income Exclusion (FEIE), subject to conditions.

Example B: U.S. Dividends

A U.S. citizen in Berlin receives dividends from U.S. stocks.
Germany, as the country of residence, taxes worldwide investment income.
The U.S. also taxes the dividends (as worldwide income).
The DTA provides that Germany grants a credit for U.S. withholding tax (up to treaty rates), while the U.S. still requires reporting.

Example C: Rental Property in the U.S.

The same U.S. citizen rents out property in New York.
Rental income is taxable in the U.S. as source-country income.
Germany, as the residence country, also taxes the rental income but typically grants relief through the DTA (exemption with progression or credit method, depending on category).

6) Filing Obligations in Germany

U.S. citizens living in Germany must:

File an annual German income tax return if they have multiple income sources, foreign income, or deductions to claim.
Declare foreign bank accounts and investments if required under anti-money laundering and information exchange rules.
Comply with U.S. reporting requirements (IRS Form 1040, FBAR, FATCA Form 8938, etc.) in parallel.

Important: Germany has no automatic withholding on worldwide income (except wages and dividends). Proper filing is therefore essential to ensure correct taxation and access to treaty relief.

Conclusion

U.S. citizens residing in Germany are subject to unlimited tax liability and must declare worldwide income in Germany. Because the U.S. also taxes worldwide income based on citizenship, careful use of the Germany–U.S. DTA and the U.S. foreign tax credit is essential to avoid double taxation. Professional tax planning is strongly recommended, especially where multiple income sources or complex assets are involved.

Frequently asked Questions about German Tax for U.S. Citizens residing in Germany

ℹ️ Click on a question to view the answer:

➕ Do U.S. citizens living in Germany pay taxes on worldwide income?

Yes. Once a U.S. citizen becomes a German tax resident, they are subject to unlimited tax liability in Germany, which covers worldwide income.

➕ How does the Germany–U.S. Double Taxation Agreement (DTA) help?

The DTA allocates taxing rights, reduces withholding tax rates, and prevents double taxation through exemptions or tax credits.

➕ Do I still have to file U.S. tax returns while living in Germany?

Yes, U.S. citizens must file annual U.S. returns (Form 1040), regardless of residence.

➕ Are U.S. Social Security benefits taxed in Germany?

Under the DTA, U.S. Social Security is taxable only in the U.S., but must be declared in Germany for progression purposes.

➕ Do I need to declare U.S. bank accounts and investments in Germany?

Yes, Germany taxes worldwide investment income. FATCA reporting also ensures transparency between Germany and the U.S.

➕ What are the German filing obligations for U.S. citizens in Germany?

Most U.S. citizens must file an annual German tax return if they have multiple income sources or foreign income.

➕ How are German salaries taxed for U.S. citizens?

German employers withhold wage tax at source. The income is also reported to the IRS with FTC relief available.

➕ Can I use the Foreign Earned Income Exclusion (FEIE) in Germany?

Yes, if you meet the bona fide residence or physical presence test, you may exclude a portion of earned income on your U.S. return.

➕ How are U.S. dividends taxed in Germany?

Germany taxes worldwide dividends. U.S. withholding tax may be credited against German tax under the DTA.

➕ How are U.S. rental properties taxed in Germany?

Rental income is taxable in the U.S. as source income, and in Germany with exemption with progression rules applied.

➕ What is the solidarity surcharge in Germany?

It is an additional tax (5.5% of income tax) that applies to higher earners in Germany.

➕ Do U.S. citizens in Germany pay church tax?

Yes, if you are officially registered as a member of a recognized church, church tax (8–9% of income tax) applies.

➕ Are 401(k) or IRA distributions taxed in Germany?

Generally, yes. Distributions are considered pension income in Germany and taxable, though treaty provisions may adjust taxation.

➕ How are German pensions taxed for U.S. citizens?

German statutory pensions are taxable in Germany, but must also be reported to the IRS. FTC may offset U.S. tax.

➕ Do U.S. citizens in Germany need to file FBAR?

Yes. If you have over $10,000 in foreign financial accounts, FBAR filing with FinCEN is mandatory.

➕ What is the FATCA requirement for U.S. citizens in Germany?

FATCA requires disclosure of foreign assets on Form 8938 if thresholds are met. German banks also report to the IRS.

➕ How are capital gains on U.S. stocks taxed in Germany?

Germany taxes capital gains on worldwide securities. U.S. withholding or taxation may also apply, but relief is possible through the DTA.

➕ Do self-employed U.S. citizens in Germany pay into German social security?

In many cases yes, unless exempt under the U.S.–Germany Totalization Agreement. Contributions depend on the activity type.

➕ Can U.S. citizens in Germany claim child benefits (Kindergeld)?

Yes, if resident and meeting eligibility rules, U.S. citizens can receive Kindergeld like German nationals.

➕ Should U.S. citizens in Germany get professional tax advice?

Yes. Due to dual reporting obligations, progressive German tax rates, and complex treaty rules, professional advice ensures compliance and prevents double taxation.