US taxation – short overview

One of the most difficult and complex issues with a longer stay in the US is US taxation. We will give you a short overview here that, however, will not be complete.

It is correct that income taxes in the US are significantly lower than those in Germany. It is also correct, however, that US citizens usually have to pay two kinds of income tax - the Federal Tax to the IRS and the State Income Tax to their state. There are 50 states in the US and almost as many different tax rates. The State Income Tax might be up to 30% of the Federal Tax. This, on the other hand, has the top rate at 39.6%. (A small example calculation can be found at the bottom of this article.)

But, fortunately, the Sunshine State of Florida that is so popular among foreigners does not have a state income tax. However, this does not mean that the citizens of Florida have to pay less, because in exchange their Community Taxes are higher than elsewhere in the US. Part of these Community Taxes are the Property Taxes on capital and real estate. The communities use this to pay for schools, streets and other public facilities. For a proper single family house, you may have to pay between $2,500 to $4,000 in Property Tax a year.

A German living in the US and making use of the German-American double taxation agreement, however, will usually still pay less than he would in his home country. But careful - your income from Germany must appear on your American tax return as well. It is especially tricky that retirement money and pensions are tax-exempt in the US while the German government usually spares them.

Even if your are liable to pay taxes in Germany but own a house in Florida and rent it out full time, you have to pay taxes on the income from that in the US. There is an allowance, however ($2750 for unmarried persons). On the next level (up to $21,525) the income will be taxed with 15% Federal Tax. In Germany, this US income, assessed according to the German tax code, are subject to progressivity proviso. The tax authority will add this income to the rest of your German income and tax it with that rate that would have to applied in Germany for the German and US income together. Losses in the US cannot be counted against the German income. In the US, a loss off-setting only works against other so-called passive income. Effectively, this means - you can only count it against income from other pieces of real estate.

Landlords who shy away from the effort of filing a US tax return can free themselves of this by having 30% of taxes deducted at the source from their rental income.

Cheating is dangerous. Foreigners who are caught for tax evasion risk losing their residence permit for the US. In that case, you may never see your house in Florida again...

The deadline for filing the US tax return for the preceding year is always April 15.

Short overview: taxes in Germany and the US - a comparison

Gross income: DM 50,000

Net income single:

Germany: DM 30,024
US: DM 37,932

Net income married, 1 child:

Germany: DM 40,129
US: DM 41,333

Gross income: DM 100,000

Net income single:

Germany: DM 49,456
US: DM 68,277

Net income married, 1 child:

Germany: DM 64,615
US: DM 76,649