It is no secret that due to the large presence the US Military had in Germany for decades many US Soldiers stayed in country after their time in service or retired here altogether. Out of those who stayed almost all at some point in their career had deployed to combat theatres overseas (Vietnam, Grenada, Panama, Persian Gulf, Somalia to name a few). Depending on the scope, size and nature of the theatre many of those Soldiers returned with wounds and injuries. Those wounds are sometimes obvious, sometimes invisible, sometimes they fester and surface only years later. Prominent silent or late killers are Agent Orange for the men who had fought in Vietnam or PTSD for pretty much anybody who spent time in a war zone.
When a US Soldier dies on active duty or a US Veteran dies as a result of a service-related injury the surviving spouse is eligible for DIC benefits.
If this spouse is a German national, living in country we have found it not uncommon that those DIC benefits will either be treated like a normal German retirement and fully taxed, or be considered at least for tax bracket purposes.
Both approaches are wrong. Those DIC benefits are completely tax-irrelevant in Germany. While we always recommend reporting them, they should not have any tax bearing on the German side at all. This is because they would be pushed down the same route as regular VA disability benefits under local German tax law. Another avenue, which can be used to achieve the same effect is article 19 of the US-German tax treaty.
When trying to keep your DIC benefits tax free in Germany, keep in mind please that we may need to conduct some research into your late spouse’s service and medical history. This is because we may need to substantiate that the reason for the payments are founded in the times spent in a warzone.
Please let us know if you are drawing DIC benefits and feel like the German tax office is handling them wrong. We are happy to go head-to-head with them.
