Germany Tax Rate and Residency Considerations for U.S. Citizens

Let’s talk taxes in Germany.

From a tax perspective, if you are a U.S. citizen living in Germany, there may not be a significant difference between being a German citizen and a resident of Germany.

The U.S. follows a system of citizenship-based taxation, meaning that U.S. citizens must continue to file tax returns on their worldwide income, even after acquiring German citizenship.

In contrast, Germany operates on a residence-based taxation system.

This means that your tax obligations remain the same as long as you reside or earn income in Germany, regardless of citizenship.

Will Dual Citizenship Affect U.S. Taxes?

If you were already living in Germany and filing U.S. expat taxes annually, holding dual citizenship may not drastically change your tax situation. 

However, if you claim German citizenship as a means of moving to Germany, you will likely want to review your financial planning and tax strategies.

Navigating the tax laws of both Germany and the U.S. requires careful attention, particularly for individuals with investments, rental properties, or business interests in both countries.


Navigating Investment Income and Taxation for U.S. Citizens in Germany

Tax Treatment in Germany

Germany taxes most investment income at a flat rate of 26.375%, which includes the solidarity surcharge. 

This applies to dividends, interest, and capital gains. However, Germany offers an annual “investor’s allowance” (Sparer-Pauschbetrag) of €1,000 per person (or €2,000 for married couples), which reduces the amount of investment income subject to tax.

Taxation and Tax Incentives for Property Ownership Between the U.S. and Germany

Real Estate Ownership and Taxation

Owning property as a U.S. citizen living in Germany brings unique tax implications that vary significantly between the two countries.

In the United States
  • Mortgage interest and property taxes on a primary residence are generally tax-deductible.
  • When selling a primary residence, homeowners may exclude up to $250,000 in capital gains (or $500,000 for married couples) if they meet residency and use requirements.
  • Rental property owners can deduct maintenance costs, depreciation, and other operating expenses.
In Germany
  • Mortgage interest on personal residences is not deductible.
  • Property taxes are comparatively low but are also not deductible.
  • Rental income is taxed as ordinary income, but expenses such as repairs, maintenance, mortgage interest, and straight-line depreciation (typically over 50 years for residential buildings) can be deducted.
  • Capital gains on the sale of property are tax-free after 10 years of ownership, or after two years of continuous personal use as a primary residence, even if sold earlier.

However, U.S. citizens must report all property gains and rental income to the IRS, even if those gains are tax-free in Germany. This can trigger additional reporting requirements and U.S. tax liability.

Special Rules Govern German Real Estate Capital Gains 

You pay no capital gains tax on the sale of your property if you sell it after holding it for ten years. 

However, if you sell the property within ten years, you will be taxed on the profits. 

An important exception applies if the property has been owner-occupied for at least two years prior to the sale. In that case, the gain is tax-free, even if the sale occurs before the ten-year holding period ends.

Cryptocurrency Tax in Germany

In addition, capital gains on cryptocurrencies held for more than one year are currently tax-free in Germany, making it an attractive jurisdiction for long-term crypto investors.

Germany's Exit Tax

Germany imposes an exit tax under the Foreign Tax Act for individuals who relinquish their unlimited tax liability, typically due to relocation abroad. This tax is triggered if the departing individual:

  • Has been subject to unlimited tax liability in Germany for at least 10 years, and
  • Holds at least 1% ownership in a corporation as a private asset.

In such cases, Germany treats the move as a deemed sale of the shareholder’s interest, and the capital gain is taxed under German income tax law, even though no actual sale has occurred.

Exit tax can create significant tax obligations at the time of relocation, especially for entrepreneurs and investors. However, with careful planning and the right structuring, it may be possible to defer or reduce this tax burden.

Tax Treatment in the U.S.

The U.S. taxes its citizens on worldwide income regardless of where they live (citizenship-based taxation). 

Investment income, such as dividends, interest, and capital gains, is subject to U.S. taxation. 

High-income earners may also face an additional 3.8% Net Investment Income Tax (NIIT) on top of ordinary income tax rates.

Even if certain investment income is tax-free in Germany (such as long-term crypto gains), it will still be taxable in the U.S.. This is a key consideration for American expats who might be unaware that foreign tax exemptions do not apply in the same way for U.S. tax purposes.

To complicate matters further, foreign tax credits (FTCs), which can offset regular U.S. income tax, do not apply to NIIT, leaving U.S. citizens potentially exposed to both German and U.S. investment income taxes.

Currency Risk and Tax Implications

U.S. citizens are required to report income and gains in U.S. dollars on their tax returns. 

Because of currency exchange rate fluctuations, this can lead to a situation where an investment shows a gain in one country and a loss in the other. 

For example, you may sell a euro-denominated investment for a profit in Germany but, due to a weakening euro against the U.S. dollar, show a loss in USD when converting for your U.S. tax return.

Alternatively, an asset may appear to have no gain in euros, but due to exchange rate gains, create a taxable gain in the U.S..

These discrepancies make it critical to maintain detailed transaction records, including original cost basis and exchange rates on purchase and sale dates, to correctly calculate and report capital gains and losses in both tax jurisdictions.


Double Tax Burden for Americans Abroad

The risk of over-taxation is real. 

While Germany may offer flat-rate taxation and certain exemptions, these do not always translate into U.S. tax relief. 

In many cases, U.S. citizens living in Germany may pay Germany’s 26.375% investment income tax plus the 3.8% NIIT, effectively making them among the most heavily taxed investors, often more than their German peers and U.S.-based counterparts.

This situation underscores the need for careful structuring of investment portfolios and proactive coordination between U.S. and German tax planning.

What About the U.S.-Germany Tax Treaty?

The U.S.-Germany Tax Treaty is designed to reduce the risk of double taxation and provide clarity for individuals earning income across borders. 

However, U.S. citizens should understand that due to the "saving clause" in the treaty, the U.S. retains the right to tax its citizens and Green Card holders as if the treaty did not exist, except in certain narrowly defined cases. This means many of the treaty’s benefits do not apply to U.S. citizens residing in Germany.

Moreover, U.S.-Germany tax treaty does not provide clarity or recognition for several U.S.-specific tax-advantaged structures, such as Roth IRAs

That Germany does not recognize Roth IRAs as tax-exempt accounts can result in unexpected taxation of earnings that would otherwise be tax-free under U.S. law. This creates additional complications for retirement planning and underscores the importance of coordinated financial advice.

That said, there are still some important provisions to be aware of.

U.S. Real Estate Income

Income from U.S. real estate investments, including rental income, is generally taxable only in the U.S. While Germany will not tax this income directly, it will include it when calculating your effective tax rate on German-sourced income through the progression clause. This can raise your tax bracket in Germany.

Additionally, it's important to note that while Germany will not tax the rental income itself, it will include the U.S. rental estate income when determining your overall tax rate (known as the 'progression clause'). This means that the U.S. income can increase the effective tax rate applied to your German-sourced income.

For example, if you have U.S. rental income and also earn income in Germany, the rental income will raise your German tax bracket, potentially resulting in a higher tax bill on your German earnings.

Social Security Benefits

U.S. Social Security benefits received by U.S. citizens and Green Card holders residing in Germany are exempt from U.S. taxation and are only taxable in Germany. While this prevents double taxation, it can result in unexpected tax exposure under German rules, especially for retirees.


Foreign Tax Credits (FTCs)

The treaty allows U.S. citizens to claim FTCs for taxes paid to Germany, helping offset U.S. tax liability. However, these credits do not apply to the Net Investment Income Tax (NIIT) and often do not eliminate double taxation entirely.

Proper planning around the treaty benefits, foreign tax credit limitations, and cross-border real estate strategy is essential to avoid unnecessary tax exposure. The U.S.-Germany Tax Treaty allows for foreign tax credits, which can help reduce double taxation. However, the credit system is not perfect:

It does not eliminate the NIIT.

Timing differences and mismatches in taxable categories between the two systems can limit credit applicability.

Additional reporting (such as Form 1116) is required to claim foreign tax credits correctly.

A cross-border tax advisor can help structure income and assets to reduce surprises and optimize your overall tax position.

Germany Tax Rates on Personal Income

Germany uses a progressive income tax system, meaning that higher levels of income are taxed at higher rates. As of 2025, the personal income tax brackets are as follows:

  • 0% on income up to €12,096 (basic personal allowance)
  • 14% to 42% on income between €12,096 and €68,429
  • 42% on income between €68,430 and €277,825
  • 45% (top tax rate) on income exceeding €277,826

In addition to federal income tax, taxpayers are also subject to:

  • Solidarity surcharge of 5.5% on the income tax due (though this is largely phased out for most taxpayers)
  • Church tax of 8% or 9%, depending on your federal state, if you are registered as a member of a church.

Example

A single filer earning €90,000 per year would fall into the 42% bracket for part of their income, but their effective tax rate would be lower due to the progressive structure.

Tax Tip: Taxable income in Germany includes worldwide income if you’re a resident. Consider the impact of both German and U.S. taxation when forecasting your effective global tax rate and when making withholding and estimated tax decisions.

Investing as a Dual Citizen

U.S. citizens, especially dual U.S.-German nationals, should be cautious about investing in European mutual funds or ETFs. These are often classified as Passive Foreign Investment Companies (PFICs) by the IRS.

PFICs are subject to:

  • Complex and burdensome annual reporting (Form 8621)
  • Punitive tax treatment, including interest charges on gains
  • Difficulty in calculating cost basis and earnings

To avoid these complications, dual citizens should generally invest through U.S.-based accounts with U.S.-domiciled ETFs and mutual funds, which do not trigger PFIC reporting requirements.

Important to note

Investing complexity and restrictions stem primarily from continued U.S. citizenship, not German residency or citizenship. 

U.S. tax law imposes extensive global reporting and limits access to foreign investment products. As a result, it is U.S. citizenship itself that creates most of the compliance and planning challenges.

Thoughtful investment selection is essential for minimizing tax complications. 

A cross-border financial planner familiar with both U.S. and German systems can help you build a compliant, tax-efficient portfolio. Thoughtful investment selection is essential for minimizing tax complications. 


German Inheritance Tax vs U.S. Estate Tax

International estate planning is a crucial consideration for U.S. citizens living in Germany, especially for those with significant assets in both countries. Many U.S. taxpayers who are German residents are often surprised to learn that inheritances received from outside of Germany by non-German citizens also fall under German inheritance tax rules.

Inheritance Tax in Germany

This tax is based on residency rather than citizenship.

This means that if you are a resident of Germany, not only your worldwide estate but also any inheritance you receive from abroad could be subject to German gift and inheritance tax. This broad application of the tax can come as an unexpected burden, particularly for those receiving inheritances from U.S.-based assets.

In contrast, the U.S. estate tax is based on citizenship, meaning U.S. citizens face U.S. estate tax exposure regardless of where they live. The U.S. has a high estate tax exemption, currently set at $13.99 million per individual through 2025. (4)

However, Germany’s thresholds are significantly lower.

German inheritance tax rates and exemptions

Germany’s inheritance tax rates and exemptions vary based on the relationship between the deceased and the beneficiary.

  • Spouses can inherit up to €500,000 tax-free
  • Children benefit from a €400,000 exemption
  • Distant relatives and unrelated individuals have a lower exemption of €20,000 and may be taxed at rates up to 50%

These rates and exemptions also apply to lifetime gifts, and thresholds reset every 10 years, making proactive planning especially important.

One significant difference between German and U.S. inheritance law is the concept of forced heirship. 

Under German law, certain family members, such as children and spouses, are legally entitled to a portion of the estate, regardless of the contents of a will. 

This can override testamentary freedom common in the U.S. and may require strategic planning, particularly for blended families or individuals wishing to disinherit legal heirs.

inheritance rule germany table

Potential strategies to plan for your inheritance as a U.S. citizen residing in Germany

There are a few strategies that may be worth considering when planning your estate and inheritance. However, you should confirm their suitability for your specific circumstances with a professional. Potential options include:

  • Establishing US trusts that are recognized in Germany
  • Utilizing regular tax-free allowances.
  • Exploring lifetime gift tax exemptions to potentially transfer wealth to heirs tax-free during your lifetime.*

Does Germany have a wealth tax?

Germany used to have a wealth tax. It has been suspended since January 1, 1996, due to the then government’s inability to reconcile inconsistencies in its application to various financial assets such as property and investments.

Being a U.S. Citizen in Germany Requires  a Cross-border Strategy

With two tax systems, overlapping obligations, and limited treaty relief, Americans living in Germany face unique challenges in investing, estate planning, and retirement.

By working with a cross-border financial advisor who understands both jurisdictions, you can reduce compliance headaches, minimize tax exposure, and focus on building long-term financial wellness in Germany.

References


Meet the Author

Arielle Tucker is a Certified Financial Planner™ and IRS Enrolled Agent with Connected Financial Planning. She's spent over a decade working with U.S. expats on U.S. tax and financial planning issues. She is passionate about working with U.S. expats and their families to help secure a financial future that is reflective of their core values. Arielle grew up in New York and has lived throughout the U.S., Germany, and Switzerland. Connected Financial Planning offers a complimentary introduction call for individuals and families seeking ongoing, comprehensive planning. You can schedule a call here.