American Expats and the IRS in Germany
Updated - April 2021
SEE SECTION AFTER THE ARTICLE:
Two new forms Americans in Germany may have to fill out for the IRS
U.S. citizens living in Germany have to file an annual return, even if no taxes are owed
The most essential thing for an American residing in Germany (or any other foreign country) to know is that he or she is required by law to file a U.S. tax return every year with the Internal Revenue Service if income is above the filing requirement. It doesn't matter if all income was earned in Germany, or if a German return was filed and German taxes paid. He or she still must file a U.S. Form 1040 (or variation of it) and normally other forms as well.
The US Embassy in Germany has a website page with information on the IRS at this link. This same website page has links to the IRS for downloadable forms and publications as well as contact numbers in the States for assistance for international customers. Additionally, there is information and links on FBAR, fatca as well as the IRS exchange rate used for filing and information on mailing tax forms.
Unless individuals are highly paid, they may not have a U.S. tax liability. Most individuals are able to qualify for the foreign earned income exclusion, which allows them to reduce their taxable income by up to $105,900 for 2019 and $107,600 for 2020 relating to compensation earned outside of the U.S. The exchange rate for the year 2019 used by the IRS to calculate income was $1.00 = €0.893 and for 2020 it is $1.00 = €.0877.
In order to claim the exclusion, an individual must fulfill the requirements of either the Substantial Presence Test (330 foreign presence days within a 12-month period) or the Bona Fide Residence Test (resident of a foreign country for a full calendar year). Once the requirements are fulfilled, the exclusion can be claimed by completing and attaching a Form 2555 to the Form 1040.
For those highly paid individuals who cannot fully exclude their foreign compensation from U.S. taxation with the foreign earned income exclusion, a foreign tax credit can be claimed by completing and attaching a Form 1116 to the Form 1040. The foreign tax credit provides a credit for German taxes paid on income earned outside of the U.S. that is subject to U.S. taxation. By claiming either or both the foreign earned income exclusion and/or the foreign tax credit, most individuals eliminate any double taxation assessed between the U.S. and Germany.
Other items of income, such as interest, dividends and capital gains, are subject to different sourcing rules depending on the circumstances. For example, interest earned on a U.S. bank account by an American residing in Germany will be taxable in Germany under the U.S./German tax treaty. The income must also be reported on the U.S. return, and a foreign tax credit can then be claimed against the U.S. tax assessed on the income.
Information regarding the taxation of other types of income and the related income tax treaties can be obtained from the IRS website at www.irs.gov/Individuals/International-Taxpayers. Americans residing overseas on April 15th receive an automatic two-month extension to June 15th for filing their U.S. tax return. When filing the return, the individual should attach a statement indicating that he or she qualified for the extension under Reg. 1.6081-5(A). The extension is only an extension of time for filing, not an extension to the payment of any tax liability. Therefore, if a tax liability is due, interest will be assessed from April 15th.
Information about the IRS and Coronavirus
Due to the Coronavirus situation the filing date for 2020 US taxes has been extended for everyone (regardless of their country of residence) to May 17, 2021. Taxpayers resident in countries outside the US should check with the IRS or your tax preparer to see what the exact deadlines are for taxpayers overseas.
Some taxpayers may be eligible for the third round of Coronavirus relief. More information here: https://www.irs.gov/coronavirus.
Greenback Expat Tax Services has a blog regarding the Coronavirus and the IRS that is updated daily here: https://www.greenbacktaxservice.com.
Greenback Expat Tax services also has information on the current Coronavirus stimulus checks at this link.
Since the implementation of the Affordable Care Act (commonly referred to as Obamacare) the IRS may require attaching a form 8965 to the annual tax return. According to the IRS: "The Affordable Care Act includes the individual shared responsibility provision and the premium tax credit that may affect your tax return. The individual shared responsibility provision requires you, your spouse, and your dependents to have qualifying health insurance for the entire year, report a health coverage exemption, or make a payment when you file."
For US citizens living abroad it may be necessary to file this form to be eligible for the "health coverage exemption". More information on that is available here. A pdf file of the form is here. Instructions in a pdf for filling out the form is here.
It sometimes happens that Americans residing outside of the U.S. are unaware of the requirement that they must file a return. The IRS is fairly tolerant in such cases. If these individuals come forward voluntarily, file returns for delinquent tax years and pay the tax owed (if any) along with related interest and penalties, there will be no criminal charges imposed. It is probably best to consult a tax professional with international taxpayer experience to prepare the late filings and correspond with the IRS.
In contrast, if the IRS discovers that a taxpayer is delinquent in filing his or her U.S. tax returns, the individual could be facing fines, property seizure, attachment of wages or even prison. Contrary to common belief, the IRS has developed sophisticated means of catching delinquents in this computer age. For example, every time an American renews a passport, the State Department obtains his or her Social Security number and reports it to the Internal Revenue Service.
You may also obtain a copy of IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, which should answer most of your questions. It is available at most Embassy and Consulate offices or can be downloaded from the IRS site. The IRS has updated their website for U.S. taxpayers living overseas. This website contains the basic tax information plus links to other detailed topics: http://www.irs.gov/Filing
Due to the complexity of both the U.S. and German tax systems and their interaction with one another, it is always recommended that you hire a tax consultant (Steuerberater/CPA) or a professional US Tax preparer to guide you through the intricacies involved in filing returns as well as to provide some ease of mind during your stay abroad
All U.S. taxpayers residing outside the United States should mail their tax returns to:
Internal Revenue Service Center
Austin, TX 73301-0215
You can if you wish also file your tax return electronically at www.irs.gov.
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