If you are an American living in Germany you remain under the purview of the IRS, and are still obligated to file taxes in the US.
However, if you earn income in Germany - and particularly if you freelance, have multiple jobs, or have income outside of a standard job where the taxes are automatically withheld - you'll likely need to make a German income tax declaration as well.
READ ALSO: A tax expert's best advice on when and why you need to file in Germany
For this reason, many Americans in Germany effectively need to complete two tax declarations each year.
In addition, another thing to keep in mind is the US's requirement to declare foreign bank accounts.
US tax declaration
One of the most common issues for US citizens living abroad involves the FBAR (Foreign Bank Account Report), a US requirement designed to prevent the use of overseas accounts for illicit financial activity.
Under US rules, individuals must file an FBAR if the combined value of their foreign accounts - including bank accounts in Germany - exceeds $10,000 at any point during the year. This flat, and notoriously low, threshold applies regardless of how many accounts are held.
This obligation also applies beyond standard bank accounts and includes brokerage accounts, certain private pensions, mutual funds, trusts and joint accounts. Find more details here.
What if you haven't done this?
Tax advisors who are familiar with both US and German rules suggest that mistakes around FBAR requirements are common.
So, if you have failed to declare German (or other foreign) accounts, there is no need to panic. There are a few solutions to go about correcting this mistake:
First is the so-called streamlined procedure. This procedure is designed for non-wilful conduct, or in other words, situations where someone's failure to report was due to a lack of awareness rather than intentional wrongdoing.
Under this program, individuals typically need to submit three years of amended federal tax returns and six years of FBARs.
Alternatively, there's the FBAR delinquency procedures, where you file the missing reports for the past six years. Even under a non-wilful standard, this may involve penalties, but these programs offer a structured way to come back into compliance.
The FBAR has a standard deadline of April 15th each year, but there's an automatic extension to October 15th if you live abroad. You will not suffer penalties for lateness.
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But failing to file can still be costly. Non-wilful violations may result in civil penalties of up to $10,000 per breach, while wilful violations can trigger far steeper penalties - $100,000 or 50 percent of the account balance.
What about German tax obligations?
Unlike the US, you are not required to report the balance of your foreign bank accounts (such as those in the US). Instead Germany taxes your worldwide income.
If you are a German tax resident - meaning you live in Germany for more than six months of the year, or have a home there - then you are also required to report income earned on your foreign accounts, for example through accumulated interest, to the German tax authorities.
This also includes dividends and capital gains triggered by selling stocks and ETFs or retirement distributions.
Note that even though a Roth IRA is tax-free in the United States, Germany does not recognize the tax-free status of Roth IRA withdrawals. So if you collect distribution from a Roth IRA while living in Germany, the German tax authorities will likely tax the growth portion of that distribution.
READ ALSO: What happens if you make a mistake on your German tax return?
With reporting by Emma Albright.
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