We covered in a previous article why filing German returns usually feels like a fairly tedious process where the taxperts need to ask all these detailed questions about single items and then still need to correspond separately with the tax office on single items. In this article we want to elaborate a bit more on this issue.
First of all, the tax office assesses your return with a risk algorithm, which yields areas which need further scrutiny. While we have a pretty good feeling which areas might come back with question marks, we cannot anticipate them all.
Second, the devil is in the details and based on your source of income separate deductions and rules apply. Let’s highlight this a bit further.
1.General filing circumstances and labor income
While the general standard deduction is similar, German tax law additionally let’s you itemize certain expenses for retirement and health care. Also, you can take additional (lumpsum) deductions for moving expenses and home office use against your labor income.
2. Trade or freelance income
It is not uncommon for clients with trade or freelance income to take a section 179 deduction on their US position. However, a section 179 deduction does not exist under German law, so any qualifying asset as under US law needs to be evaluated separately.
3. Rental income
While the US tax law knows a tax exemption for the sale of a family home, which requires certain requirements to be met, German tax law has no such restrictions for the sale of property which has only been used for private / family use.
Also, German tax law will let you sell nearly every piece of real property fully tax-free after a 10-year holding period. Usually this cannot be done on the US side.
Also, the depreciation rules for German real property are different from the US one and the way like-kind exchanges can be done under US law is not identical on the German end.
4. Investment income
On the US side wash-sale losses are disregarded. The concept of a wash-sale loss to be disregarded does not exist under German law. Also, losses from options trading cannot be offset with other investment income under German law. German tax law also does not have a preferential tax treatment for long-term capital gains – unless the stock has been purchased previous to 2009. Also, German tax law does not have a concept where interest income from municipality bonds would be treated as non-taxable, either.
5. Retirement income
Depending on where your retirement income stems from – i.e. government or private employment, and when it started, not the full gross income will be subject to German taxation. Certain exemptions and deductions will be applied.
We hope this helps shed some light on why US income will never be 1:1 recognized under German law – despite certain similarities. Essentially it does not repeat but mostly rhymes. In this, the taxperts are the lyricists to translate your English tax poem.
