Here's the thing most people don't realise before they move: the US taxes its citizens on worldwide income regardless of where they live. It's one of only two countries that does this (the other is Eritrea). Moving to Germany doesn't end your US tax obligations — it adds German ones on top.
That sounds alarming. It doesn't have to be.
The US and Germany have a comprehensive tax treaty specifically designed to prevent you from paying full tax in both countries. But making it work means understanding which tools apply to your situation — not just knowing they exist.
Key Facts at a Glance
| Detail | 2026 Figure |
|---|---|
| Foreign Earned Income Exclusion (FEIE) | $132,900 |
| Foreign Housing Exclusion cap | $39,870 |
| Child Tax Credit (per child) | $2,200 ($1,700 refundable) |
| Germany capital gains flat tax | 26.375% (incl. Soli) |
| FBAR filing threshold | $10,000 in foreign accounts |
| FATCA threshold (single, abroad) | $200,000 year-end / $300,000 at any point |
| FATCA threshold (married, abroad) | $400,000 year-end / $600,000 at any point |
| US-Germany treaty dividend withholding | 15% (5% for qualifying corporate holders) |
How Tax Residency Works in Both Countries
You become a German tax resident once you register an address (Anmeldung) in Germany, or after spending more than 183 days there in a calendar year. From that point, Germany taxes your worldwide income — including remote work for US clients, investment returns, and rental income back home.
Meanwhile, you're still filing with the IRS every year. For most Americans in Germany, this dual obligation sounds worse than it actually is. German tax rates are typically higher than US rates, which counterintuitively works in your favour — because of how the credits work.
The Five Tools That Prevent Double Taxation
1. Foreign Tax Credit (FTC)
This is the most widely used strategy for US expats in Germany. You report your worldwide income to the IRS, then claim a dollar-for-dollar credit for the German taxes you've already paid. Since Germany's rates are generally higher than the US's, this often reduces your US tax bill to zero.
You claim it on IRS Form 1116. One important constraint: you can't use the FTC and the FEIE (below) on the same income in the same year. You pick whichever works better for your situation. Most expats in Germany benefit more from the FTC precisely because German rates are high enough to offset the full US liability.
If you overpay in a given year, you can carry unused credits back one year or forward up to ten years.
2. Foreign Earned Income Exclusion (FEIE)
The FEIE lets you exclude up to $132,900 (the 2026 figure, adjusted annually for inflation) of foreign-earned income from your US taxable income. You qualify through either the Bona Fide Residence test — you've established a genuine residence in Germany — or the Physical Presence test, which requires 330 days outside the US in any rolling 12-month period.
You claim it on IRS Form 2555. One thing to be clear on: investment income, rental income, and passive income don't qualify. This only covers earned income from employment or self-employment.
The FEIE tends to be more attractive in lower-tax countries. In Germany, the FTC is usually the better choice since you're already paying high taxes that generate large credits. But if your housing costs are substantial, the combination of FEIE plus the housing exclusion (below) can sometimes come out ahead.
3. Foreign Housing Exclusion or Deduction
If you're using the FEIE, you can also exclude or deduct certain housing costs that exceed an IRS base amount — rent, utilities, renter's insurance. The 2026 cap for the housing exclusion is $39,870. In expensive German cities like Munich or Frankfurt, this adds meaningfully to your total exclusion.
Also claimed on Form 2555 alongside the FEIE. If you're self-employed, you take this as a deduction instead of an exclusion — same benefit, slightly different tax treatment.
4. Totalization Agreement (Social Security)
The US and Germany have a social security totalization agreement, which means you don't pay into both systems at the same time. If you're employed in Germany and contributing to German social insurance, you're exempt from US Social Security and Medicare taxes on that income. The agreement also lets you combine work credits from both countries if you need them later for benefit qualification — you need at least six US credits to use this provision.
This matters especially if you're self-employed. Without the totalization agreement, you'd owe both US self-employment tax (15.3%) and German social contributions on the same income. For a temporary assignment of five years or less where your US employer sends you to Germany, you can remain under the US system instead.
5. Child Tax Credit
US citizens with qualifying children under 17 can claim up to $2,200 per child against their US tax bill, with up to $1,700 of that refundable in 2026. This applies while living abroad, as long as you're filing a US return. Even if the FTC wipes out your income tax liability, the refundable portion can still result in a payment from the IRS.
What About Capital Gains and Investments?
Germany taxes investment income at a flat 26.375% (that's the 25% Abgeltungsteuer plus 5.5% solidarity surcharge, with an additional ~1.5% if you pay church tax). The US taxes long-term capital gains at 0%, 15%, or 20% depending on your income bracket.
The FTC applies to capital gains, but the interaction between the two systems needs careful planning. Germany's flat rate often exceeds your US rate, which means excess credits — but those credits may not always be usable against other US income categories due to the "basket" rules in Form 1116. A cross-border tax advisor can help you structure the timing of capital gains to minimise this mismatch.
Germany also has a Sparerpauschbetrag — a tax-free allowance of €1,000 per person (€2,000 for couples) on investment income. Make sure your German broker has your Freistellungsauftrag on file to avoid unnecessary withholding. Our tax guide covers how this works in more detail.
US-Germany Tax Treaty: What It Actually Covers
The treaty, originally signed in 1989, sets the rules for which country gets to tax what. Here's what matters most for expats:
Dividends paid from one country to a resident of the other are subject to reduced withholding — 15% in most cases, or 5% for qualifying corporate shareholders with at least 10% ownership. Interest and royalties between the two countries are generally exempt from withholding tax entirely.
The treaty also includes a "saving clause" — the US reserves the right to tax its citizens as if the treaty didn't exist, but then allows the treaty's relief mechanisms (FTC, FEIE) to prevent actual double taxation. In practice, this means you still file your US return and claim the appropriate credits or exclusions.
If you believe you're being taxed in violation of the treaty, you can request a Mutual Agreement Procedure (MAP) through the IRS or the German Bundeszentralamt für Steuern.
FBAR and FATCA: The Reporting Requirements That Catch People Off Guard
These aren't taxes — they're reporting requirements. But the penalties for ignoring them are severe enough that they deserve their own section.
If your foreign financial accounts (German bank accounts, investment accounts, even accounts where you have signature authority) exceed $10,000 in aggregate at any point during the year, you must file an FBAR — FinCEN Form 114, filed electronically through the BSA E-Filing System. The deadline is April 15 with an automatic extension to October 15.
FATCA reporting (Form 8938) kicks in at higher thresholds, and the thresholds are more generous if you live abroad. Single filers living outside the US must report if their foreign assets exceed $200,000 on the last day of the tax year or $300,000 at any point during the year. For married couples filing jointly, those numbers double to $400,000 and $600,000 respectively.
FBAR and FATCA penalties are no joke. Willful failure to file an FBAR can result in penalties up to $100,000 or 50% of the account balance per violation. Even non-willful penalties run up to $10,000 per account. These are reporting forms, not tax bills — but ignoring them is a mistake that's very hard to walk back.
State Taxes: The Obligation That Follows You
Moving abroad doesn't automatically cut your US state tax ties. A few states are particularly aggressive about taxing former residents who maintain any connection — property, a driver's licence, bank accounts, or even a storage unit.
California, Virginia, and New Mexico are known for continuing to claim tax residency on former residents. South Carolina and Connecticut have similar provisions. If you're from any of these states, get specific advice on how to cleanly establish non-residency before you leave. This usually means closing accounts, surrendering your driver's licence, and filing a part-year return in your departure year.
States with no income tax (Texas, Florida, Washington, Nevada, and a few others) obviously don't create this issue.
FTC vs. FEIE: Which Should You Choose?
The combination that works for most employed professionals in Germany: the Foreign Tax Credit plus the housing deduction, alongside the Totalization Agreement. Since German tax rates regularly exceed US rates, the FTC typically wipes out your entire US income tax liability.
The FEIE makes more sense if you're in a situation where your German taxes are unusually low (perhaps you arrived mid-year and only have partial-year German income) or if your housing costs are very high relative to your income.
One critical detail: the choice you make in year one can have multi-year consequences. If you elect the FEIE and later want to switch to the FTC, you may need IRS approval to revoke the election, and the revocation generally prevents you from re-electing the FEIE for five years. This is one area where guessing is expensive.
Filing Your German Tax Return
Once you're a German tax resident, you'll also want to understand the Steuererklärung process. Germany's tax year runs January to December, and returns are generally due by the end of July the following year (with extensions available if you use a Steuerberater). Many deductions are available that can significantly reduce your German tax burden — moving costs, double household maintenance, commuting allowances, and more.
For a complete breakdown of German tax brackets, social contributions, and what your payslip will actually look like, see our expat tax guide.
Frequently Asked Questions
Do I have to file US taxes if I live in Germany permanently? Yes. The US taxes citizens on worldwide income regardless of where they live. You must file a US return every year, even if you owe nothing after applying the Foreign Tax Credit or FEIE. The filing threshold is the same as for US residents.
Which is better for US expats in Germany — the FTC or the FEIE? For most employed professionals in Germany, the Foreign Tax Credit is more advantageous because German tax rates exceed US rates. The dollar-for-dollar credit typically eliminates your entire US tax liability, and unused credits can be carried forward up to ten years.
Can I lose my US Social Security benefits if I work in Germany? No. The US-Germany totalization agreement protects your benefits. You won't pay into both systems simultaneously, and you can combine work credits from both countries to qualify for benefits. You need at least six US credits to use the combined-credit provision.
What happens if I don't file an FBAR? Penalties are steep. Non-willful violations carry fines up to $10,000 per account, per year. Willful violations can result in penalties of $100,000 or 50% of the account balance, whichever is greater, plus potential criminal charges. The IRS has been increasingly aggressive about enforcement.
Do I need to report my German pension contributions on my US return? German employer pension contributions are generally not taxable for US purposes until you receive distributions. However, you should report foreign pension accounts on your FBAR and potentially on Form 8938 if they push you over the FATCA thresholds. The tax treatment of German pension distributions depends on the type of pension and the treaty provisions.
Should I hire a tax professional or can I do this myself? For most US expats in Germany, a cross-border tax professional is worth the investment. The interaction between two tax systems, the FTC vs. FEIE decision, treaty provisions, and reporting requirements like FBAR and FATCA create enough complexity that a mistake can cost more than years of professional fees. Look for a US CPA or Enrolled Agent who specifically works with expats in Germany.
Tax strategy is one of the first things we recommend sorting out before your move — ideally alongside your visa application and health insurance setup. At Move2Europe, we can connect you with cross-border tax professionals and help you think through the sequencing.
Book a free consultation and let's map out what you need to get sorted before you arrive.
Official sources:
- IRS — Foreign Earned Income Exclusion — FEIE eligibility, amounts, and Form 2555 instructions
- IRS — Foreign Tax Credit — How to claim credits for taxes paid to Germany
- IRS — US-Germany Tax Treaty Documents — Full treaty text and technical explanations
- SSA — Totalization Agreement with Germany — Social security coordination between the US and Germany
- FinCEN — FBAR Filing — Electronic filing for FinCEN Form 114
- IRS — FATCA / Form 8938 — Thresholds and reporting requirements for foreign financial assets