Taxes in Germany
Congratulations on your move to Germany! While the German tax system can seem intimidating at first, we are here to guide you through the basics of how it all works. With our seven powerful tips, you will be able to navigate the convoluted tax system with ease and avoid painful fees come tax time.
Tip 1: Germany’s Progressive Tax System
Germany has a progressive income tax system, which means that higher-income earners pay a higher percentage of their income in taxes. The tax rate ranges from 14% to 42%, depending on income levels. As of 2021, the income tax rates in Germany are as follows:
- Up to €9,408: 0%
- From €9,409 to €57,051: 14% to 42%
- From €57,052 to €270,500: 42%
- Above €270,501: 45%
It is important to note that this progressive tax system applies to all employees, including expats, regardless of their citizenship or residency status. This means that if an expat earns a higher income in Germany, they will be subject to the same progressive tax rates as German citizens. Additionally, employers are required to deduct income tax from their employees’ salaries and remit the funds to the German tax authorities on their behalf.
Tip 2: Annual Tax Return
In Germany, the requirement to file an annual tax return is based on various factors. If you earn income from other sources besides your employer, such as from rental income or investments, you will need to file a tax return to declare this income. Self-employed individuals are also required to file a tax return.
However, if you only receive income from an employer and have no other taxable income, you may not be required to file a tax return. This is because the employer will automatically deduct taxes from your paycheck through the payroll system, which means that the tax authority already has a record of your income and taxes paid.
It’s important to note that even if you are not required to file a tax return, it may still be beneficial to do so. This is because you may be eligible for certain tax deductions or credits that can lower your tax bill or even result in a tax refund. Additionally, if you are unsure about your tax situation or have questions about filing a tax return, you can consult with a tax advisor or contact the tax authority for guidance.
Tip 3: Tax Residency vs. Legal Residency
It’s important to understand the difference between tax residency and being a resident for legal purposes. A tax resident is someone who is liable to pay tax on their worldwide income in Germany, while a legal resident only needs to pay tax on the income earned within Germany’s borders.
Tip 4: Deductions and Exemptions
The German tax system provides various tax deductions and exemptions, which can reduce the amount of taxable income, resulting in lower taxes. For instance, taxpayers can claim deductions for private health insurance, long-term care insurance, and disability insurance premiums. Contributions to retirement and pension schemes are also tax-deductible, with an annual limit of €25,046 for employees and €20,000 for self-employed individuals.
In addition to these deductions, taxpayers can claim work-related expenses such as business travel, office supplies, and professional development courses. If the expenses are deemed necessary and reasonable for the job, they can be deducted from taxable income.
Charitable donations are also tax-deductible in Germany. Taxpayers can claim up to 20% of their taxable income for donations made to eligible charities, such as nonprofit organizations and religious institutions. However, to qualify for the tax deduction, the charity must be registered with the German tax authorities, and the donation must be documented with a receipt or a bank statement.
It’s essential to keep track of all tax deductions and exemptions and submit the necessary documentation when filing tax returns. This can help to lower the amount of taxes owed and result in significant savings for taxpayers.
Tip 5: Due Dates of Payment and Filing Returns
It’s crucial to know the due dates for tax payments and filing returns in Germany. Tax returns are due by July 31st each year, and taxpayers may file an extension if they miss the deadline. Additionally, taxes are paid on a quarterly basis, and failure to pay on time will incur interest.
Tip 6: Filing Taxes in Your Home Country
It’s important to note that you may still have to file your taxes in the country you lived in before you moved to Germany. For example, U.S. citizens have this requirement in writing inside their passports. This is because the United States taxes its citizens and green card holders on their worldwide income, regardless of where they reside.
However, there are certain exclusions and deductions that may apply to reduce or eliminate U.S. tax liability for expats. The most commonly used exclusion is the Foreign Earned Income Exclusion (FEIE), which allows qualifying taxpayers to exclude up to a certain amount of foreign-earned income from their taxable income.
Additionally, U.S. citizens and green card holders who have foreign bank accounts with an aggregate value of $10,000 or more are required to file a Report of Foreign Bank and Financial Accounts (FBAR) each year with the U.S. Treasury Department. The penalties for not filing FBARs can be severe, with fines ranging from $10,000 per violation to up to 50% of the account balance per year. It is essential for U.S. citizens and green card holders living in Germany to understand and comply with both German and U.S. tax laws to avoid any legal and financial consequences.
Of course, this is just an example for US citizens, you should check information about tax requirements depending on where you come from. We also advise asking a tax consultant from your own country for help to guide you in the process, because it can be tricky and you certainly don’t want to get into trouble!
Tip 7: Hire a Tax Consultant
While it’s possible to navigate the German tax system on your own, hiring a tax consultant is highly recommended. The tax laws change frequently and can be overwhelming, even for Germans. As an expat, you may have unique tax situations, and a tax consultant can help you navigate them with ease.
The German tax system may seem complicated at first, but with these seven tips, you can begin to navigate it with ease. Take the time to understand the rules and regulations, and don’t be afraid to seek help from a tax consultant or the tax authority. We are not experts on this topic, so having an expert on your side and a solid understanding of the process will be your greatest asset. With this knowledge, you can avoid painful fees come tax time and focus on enjoying your new life in Germany.