IRS Tax Exemption for Americans in Germany

I work and live as a freelancer in Germany and I’ve successfully avoided paying IRS taxes for the last several years. I don’t pay separately into the German pension system nor separately into the German healthcare system (I have private insurance through an American company); I only pay German income tax. If you live and work in Germany as an employee then you probably automatically pay into the German healthcare and pension system, and therefore it’s very likely you also qualify not to pay US taxes to the IRS. This is an easy process and I’ll explain the details below.

Background

America is one of the few – if not only – countries to tax its citizens who live abroad. This means federal income tax, Social Security tax, and Medicare tax. The income tax depends on how much you earn, and the Social Security and Medicare taxes combined start at about 15% of your gross income.

Luckily our government has reached what’s known as “totalization agreements” with 26 countries. These are all countries in Europe except four, and include Germany. Because we have this agreement with Germany it means if we pay into the German “Social Security” and “Medicare” equivalents, we don’t have to simultaneously pay into the American Social Security and Medicare systems (and vice-versa for Germans living in the United States).

You still have to file your taxes every year with the IRS, but you can claim an exemption for your income, Medicare, and Social Security taxes. Note, the totalization agreement exempts you from American Medicare and Social Security taxes. You are still subject to income tax, but you can get out of this with the separate earned income tax exemption, all of which is explained below.

Claiming these exemptions with the Internal Revenue Service – German side

Under the terms of our totalization agreement, to quality for the Social Security and Medicare IRS tax exemptions you first need to get a form that is issued by the German federal pension office, known in German as the Deutsche Rentenversicherung Bund. This form is called a Certificate of Coverage, or in German, “Versicherungsbescheinigung.”

You have to make a new request each year to get a Certificate of Coverage. To make this request, send the information at the bottom of this page on a piece of paper (fill in your details) to the German federal pension office. Within a period of weeks to months you’ll get your Certificate of Coverage in the mail.

To qualify for this Certificate of Coverage you need to live in Germany and pay into the German pension and healthcare systems. However there are some loopholes that allow a person like me who pays German income tax (generally you must do this if you live and work in Germany) and who buys American travel insurance to qualify for this Certificate of Coverage. If you’re an employee who works in Germany then you should have no problem qualifying for the Certificate of Coverage.

Claiming the exemptions – American side

Once you have the Certificate of Coverage you can do your IRS taxes as usual. Except now you will include an extra form: Form 2555 or Form 2555-EZ. These are known as foreign earned income exemption forms. Form 2555 is for you if you have your own business or are a freelancer. The 2555-EZ is for you if you’re an employee of a business or company in Germany.

This currently lets you exempt $102,100 of your earnings from income tax, and that number goes up every year to match inflation. Follow the instructions on those forms and you’ll get to subtract out the money you made in Germany on your 1040.

Just to be very clear: Form 2555/-EZ gives you the exemption from income tax. The Certificate of Coverage gives you an exemption from Social Security and Medicare tax (write in “Exempt, see attached statement” on the 1040 line for self-employment tax).

Send in your usual tax filings, Form 2555, and your Certificate of Coverage to the IRS address for people filing from abroad and you’re all set. For my taxes I submit a 1040, a 1040 Schedule C, a 2555, and a German-issued Certificate of Coverage.

The 2555 forms (normal and EZ) aren’t long so read through all the instructions. They don’t grant everyone an exemption but you can easily see if you qualify. It’s worked for me for several years, and it sure beats paying double taxes. Remember, according to German law if you live and work here you must also pay German taxes.

Also, the IRS lets you have an automatic two-month extension if you’re filing your taxes from abroad. To claim this you just need to write on a piece of paper, “I live abroad and would like to claim the two-month extension on filing my taxes.” Sign, date, and include that with your taxes when you mail them in and you automatically get the extension applied post-factum. If that’s not enough extra time, you can always file for an extension.

Requesting your certificate of coverage from the German government

Thanks to Kennon from Toytown for the following information. I can vouch that it has worked several years for me, and that linked-to discussion has some useful information about taxes in Germany and the USA.

To request a Certificate of Coverage mail the following on a piece of paper to: Deutsche Rentenversicherung Bund; 10704 Berlin

(Your full name)

(Your address)

(Your city, and the date DD.MM.YYYY)

Deutsche Rentenversicherung Bund
10704 Berlin

Betreff: Versicherungsbescheinigung gem. Art. 6.1. des Abkommen

Sehr geehrte Damen und Herren,

In obiger Angelegenheit bitte ich um das Formular D/USA 101-A für:

Name: (your full name)

Staatsangehörigkeit: amerikanisch

Amerikanische Sozialversicherungsnummer: (your American Social Security number)

Deutsche Steuer-Nr: (your German tax number)

Deutsche Versicherungsnummer: (your German health insurance number – if none write “keine”)

Ständige Anschrift: (your address)

Tätigkeit: (your profession)

Geschäftsanschrift: (your business address – can be the same as your home address)

Geburtsdatum: (birthday: DD.MM.YYYY

Geburtsort: (your birthplace)

Zeitraum: (The dates you’re requesting this certificate for. You will likely want this for the entire year so write, “von 01.01.2018 bis 31.12.2018”)

Mit freundlichen Grüßen,

(Your full name)

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