4 mistakes expats should avoid when preparing their German income tax return

Jessica Schmidt is a certified German tax advisor with more than 12 years of experience in the field of expat taxation. In this article she looks at some of the most common mistakes expats make when filing their German tax returns – and offers some smart advice, to help you avoid losing money.  

Filling out a German tax return as an expat can be tricky, especially if you don’t speak the language. Making a mistake could end up costing you a lot of money or – worst case scenario – accidentally lead to a tax evasion.

1. Year of transfer: Moving to Germany

The first common mistake is that taxpayers struggle with transfer years and do not include foreign income and deductions correctly in their German tax return. 

Once you arrive in Germany and switch your residency or place of abode to Germany, you become subject to unlimited taxation, which means you are subject to tax on your worldwide income. In Germany, the tax year corresponds to the calendar year.

This means that if you arrive in Germany mid-year (which most people do) and start working as an employee, you must also declare any foreign employment income earned within that calendar year in your German tax return. In many cases, this income is tax exempted in Germany under the corresponding Double Tax Treaty – but it is subject to the so-called “Progression Clause”, which means that it must be declared in your tax return because it increases your German tax rate.

The question in declaring foreign income is: How is this foreign income determined? What does it include and can it be minimised? Foreign employment income is generally your gross foreign income. However, it can be reduced by deductions that are allowed under German tax law. A tax advisor can help you maximise these deductions – more on this below.

2. Deductions

Besides actual work-related costs and special expenses that are deductible in your German tax return, there are lump sums and allowances that you can deduct to minimise your German tax burden. For instance, a standard deduction of 1.000 euros per year for work-related expenses is granted without proof and automatically deducted.

Other deductions that expats can take advantage of are the lump sums for work equipment (110 euros per year), which is usually accepted by the tax authorities, bank account fees (16 euros per year), relocation lump sum for a work-related move (the amount changes every year), and the allowance for work related travel (30 cents per kilometre).

The expenses incurred in the maintenance of two households for work-related reasons (rent, home trips, per diems, and so on) are also tax deductible under certain conditions. There are also allowances for taxpayers with children, such as the childcare and children allowance (Kinderfreibeträge), and child benefit (Kindergeld).

You should not forget to include these deductions correctly in your German tax return, because otherwise you may receive a smaller tax refund than you are entitled to!

3. Single or joint filing for married couples

In many cases, single or joint filing is straightforward. Married couples residing in Germany can generally decide on a yearly basis whether they would like to file their tax return separately or together, under the conditions of § 26 EStG. In many cases, especially if there are large differences between the two incomes, joint filing is more beneficial as it can entitle you to a more favourable tax rate.  

However, there are also cases where one partner lives and works in Germany while their spouse lives in a different county. If the spouse who lives outside Germany resides within the EU or the European Economic Area (EEA), they can apply to be subject to unlimited taxation in Germany as well. This means that joint filing is also possible in these cases. However, if you apply for joint filing, this means that your spouse's foreign income also needs to be declared. Even though it is exempted from taxation in most cases, it increases your tax rate.

The mistakes I have often seen are that some people do not know about the possibility of joint filing or forget to declare their spouse’s income. Not declaring your spouse’s income can be considered tax fraud.

4. Filing deadline

The deadline for filing a tax return in Germany is July 31 of the following year (i.e. July 31, 2020 for your 2019 tax return). If a tax advisor prepares your German tax return, the deadline is extended until the end of February of the second following year (i.e. February 2021 for your 2019 return).

If the tax return is not filed within the due date, late filing penalties may be charged. This means that the deadline for your 2019 German tax return expired on July 31, 2020. However, if you engage a tax advisor now, late filing penalties may be avoided.

If you need any tax advice or help preparing your German income tax return, please feel free to contact Jessica Schmidt at www.privatax.de.