The US Military is very different from the German Bundeswehr. Not only in terms of abilities, fighting power and public recognition. But also, when it comes to paying its members. While service in the German Military will definitely result in a pension after sufficient time has been put in and the discharge was honorable, the US Military paycheck also includes mandatory contributions towards the US Social Security system. What does this mean? It means that while the German soldier will only see a pension in his older days, the US Soldier will draw twofold – firsts his pension right after his service is up, second a Social Security check once he hits at least the minimum retirement age.
The tax benefits for those two sources are very different. A US government pension can only be taxed in the United States – Germany will consider this income to put you in a different tax bracket for income which it can tax.
This is where the Social Security benefits come into play. We understand that one might want to argue that those Social Security benefits should be treated the way government pensions are – especially in cases where a US Military retiree continued working as a civilian for the US government. After all, in a case like this the Social Security benefits are all attributable to government service. While we see the merit in such thought and can think of arguments to substantiate it, we do not recommend taking this approach. The reason being that the German-American tax treaty allocates the taxation rights for Social Security benefits to Germany. So, any German tax office will fight very hard over this. We are happy to make your case a textbook one but please be aware that this will mean a years-long legal struggle in the court system without guaranteed success. For this reason, we would decide not to drag you into such quagmire and instead just subject your US Social Security benefits to German taxation – at a rate which considers your US Military pension, and other government benefits such as OPM or TSP payouts.
Overall, this means you will be having a tax liability in Germany due to your US Social Security benefits and the tax rate effect from your US government pension(s). For this reason, we advise the following:
- Please let us know if your SSA benefits are related to a service-injury. If they are, there is a reason to have those benefits treated as tax-free, which can lower your German tax liability to zero if there is no other German income. Please check out this article on this!
- Please always have us file a German tax return in a timely manner. It becomes a lot more tedious and comes with a lot more strings attached (to include potential evasion charges) when this happens so many years after you retire. Also, it becomes more expensive than necessary as you can be on the hook for so many years back at once and there will be late fees and interest charges. In a bad case, the interest will double your tax liability.
- Please have all the paperwork on your Military, OPM, TSP and other government pension (DD214, 1099-R, excerpt from personnel file) readily available. Things move a lot more smoothly if we can get right to work. In the meantime, feel free to check out our other articles on OPM and TSP benefits – I am a retired government civilian – can Germany tax my OPM pension and TSP benefits? and 9/11 and beyond: How US Veterans in Germany can navigate taxation on military benefits
