German Pension Accounts
- Social Security in Germany (Rentenversicherung)
- US - Germany Social Security Totalization Agreement
- Taxation of Social Security Benefits
- Contributions to Employer Pension Schemes
- Taxation of German Pension Benefits
- Tie-Breaker Rule to Apply Treaty Benefits
Social Security in Germany (Rentenversicherung)
Contributions to the German Public Retirement System withheld from your paycheck or made on self-employment income are not deductible from the U.S. taxable income and do not qualify for the foreign earned income credit.
You can check your record of the German Public Retirement System account online.
US - Germany Social Security Totalization Agreement
An agreement between the United States and the Federal Republic of Germany improves Social Security protection for people who work or have worked in both countries. It helps people who, without the agreement, would not be eligible for retirement, disability or survivors benefits under the Social Security system of one or both countries. It also helps many people who would otherwise have to pay Social Security taxes to both countries on the same earnings.
The provisions of the agreement eliminate double Social Security taxation and permit dual residents to use their work in both countries to qualify for benefits.
If you are self-employed
Contributions to German Public Retirement System make you exempt from contributions to the U.S. Social Security system that otherwise would be required in the US on self-employment income.
How it impacts those who want to earn US Social Security credits
If you have Social Security credits in both the United States and Germany, you may be eligible for benefits from one or both countries. If you meet all the basic requirements under one country's system, you will get a regular benefit from that country. If you do not have enough work credits under the US system to qualify for regular benefits, you may be able to qualify for a partial benefit from the United States based on both US and German credits. To be eligible to have your German credits counted, you must have earned at least six credits under the US system. To be eligible to have your US credits counted towards German benefits you must have a minimum period of coverage in Germany totaling 18 months.
Although the agreement allows the Social Security Administration to qualify for US retirement, disability or survivor benefits, the agreement doesn’t cover Medicare benefits.
Taxation of Social Security Benefits
US Social Security Benefits
US Social Security benefits received by US citizens and green card holders residing in Germany are exempt from tax in the United States and are taxable only in Germany.
German State Pension
German State Pension and other payments received under the German Public Retirement system legislation by US citizens and green card holders residing in Germany are taxable in both countries.
The foreign tax credit can be applied to eliminate double taxation.
Contributions to Employer Pension Schemes
When a U.S. citizen/green card holder is a participant in an employer pension scheme established in Germany:
- Contributions paid by or on behalf of that individual to the pension scheme may be excludable in computing his U.S. taxable income
- Any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer is not treated as part of the employee’s taxable income
However - exclusion of contributions to the pension scheme is not mandatory. You may report those contributions on our Tax Questionnaire (Income > Wages > Income Outside of the U.S. tab, question - Did your employer contribute to your pension plan? to have it added to your annual taxable income.
Considering the high tax rate paid in Germany on earned income, added employer contributions may still leave you tax-free in the U.S. Your benefit: the added amount will be considered previously taxed - which will reduce the taxable portion of pension payments in the future.
Taxation of German Pension Benefits
Pensions and other similar remunerations paid to US citizen/green card holder residing in Germany are taxable in both countries.
However, you can eliminate the burden of double taxation. Taxes paid in Germany on pension income are applied as a foreign tax credit against tax owed on the same income in the US.
Tie-Breaker Rule to Apply Treaty Benefits
U.S. green card holders residing in Germany may elect to apply what is known as the tie-breaker rule of the US/Germany Tax Treaty and be deemed a resident only of the State (i.e. country) with which their personal and economic relations are closer (Germany).
Under such an election, the individual would file form 1040NR and report only income derived from US sources. The requirement to provide full disclosure of foreign bank accounts remains and tax on income from US sources will be higher than a tax on the same income when applied to US residents filing form 1040.