Many Americans who are living in Germany have at some point served in the US Armed Forces – Army, Navy, Marines, Cost Guard or Navy. Almost all of them – when leaving the Military under honorable conditions – leave with a disability rating due to the emotional and physical stress imposed on them while serving their country at home or overseas. For this they rightfully are eligible for a monthly service-related disability benefit which – based on their rating and their disabilities – can range from a few hundred to a few thousand dollars per month.
While this benefit is tax-free in the US living in Germany while drawing VA benefits comes with two major strings attached. First, the German tax office does not automatically know about them. This means that the VA benefits need to be included in and reported on a German tax return, which in many cases has not happened at all yet. Second, not every single tax office or tax advisor is familiar with VA benefits and knows how to treat them – some want to tax them fully, some only partially and some only want to consider them for tax bracket purposes. The familiarity mostly depends on whether you reside in an area where there is currently still a large US installation – or at least was until the recent future.
VA benefits are actually fully tax-free in Germany too – this means no inclusion in the German tax base at all and no consideration by way of tax bracket either. The German Income Tax Act and tax court rulings indicate so. However one can only be so sure about it and the last thing you want to risk is running into a tax office which – for lack of better knowledge – accuses you of tax fraud based on your unreported VA benefits.
For this reason we advise back-reporting VA benefits, point out why no wrongdoing has happened and explain as to the full tax-exemption of the VA benefits. We have done this a few times already and made good experiences with our approach.
Please reach out to us if you think this affects you, if you have questions or specific consulting advice on this issue.
