How U.S. Citizens in Germany Avoid Double Taxation: Foreign Earned Income Exclusion (FEIE) vs. Foreign Tax Credit (FTC) 

U.S. citizens are required to file a U.S. tax return while living in Germany. One of the most common tax concerns for Americans living in Germany is: 

“If I pay taxes in Germany, do I have to pay taxes on the same income again in the U.S. and how can I avoid double taxation? What are the differences between the Foreign Tax Credit vs. the FEIE and which method is best for me?” 

The good news is that in most cases, U.S. citizens with income from Germany can avoid double taxation. In a first step, the double taxation agreement between Germany and the U.S. (tax treaty) should be reviewed. After review, it is essential that the tax treaty is applied consistently in both jurisdictions. See our detailed guide “U.S. Citizens Living in Germany: How Germany Will Tax You as an American Expat” on how this generally works and how your income should be allocated. If this has been properly sorted out, the second question is how to report your income taxable in Germany in your US income tax return to optimize your tax position. 

The two main tools to report foreign income under U.S. tax law are: 

1. Foreign Earned Income Exclusion (FEIE) 

2. Foreign Tax Credit (FTC) 

The application of these methods is at the discretion of the taxpayer. Both methods reduce your U.S. taxes. But both methods work differently and often lead to different results. 

Practical tip: For expat families living and working in Germany, often the Foreign Tax Credit is the better choice. In this article, we will explain both methods and why. 

The United States taxes based on citizenship, not just residence. This means: 

• Even if you permanently live in Germany, 

• Even if your income comes only or mainly from a German employer, 

• Even if you already pay high German taxes in Germany, 

you still must file a U.S. tax return every year. 

Germany applies the worldwide income principle and generally requires full taxation of your worldwide income in Germany. To avoid double taxation, German tax law (§ 34c EStG) recognizes three methods to avoid or limit double taxation: 

• Foreign income exclusion (usually associated with income tax progression clause) 

• Foreign tax credit (usually limited to certain income types, like investment income) 

• Foreign tax deduction (typically not relevant for U.S. citizens because of more advantageous rules under the tax treaty) 

These rules apply to income that is considered foreign income from a German tax perspective. They do not apply to domestic income from Germany.  

U.S. taxes for Americans living in Germany are different: From a U.S. tax perspective, adequate treatment of your income from Germany should be ensured. Without double taxation relief rules, a salary earned in Germany could be taxed once in Germany and then again in the United States. To prevent this, U.S. tax law provides mechanisms to reduce or eliminate U.S. tax on foreign income. 

Option 1: Foreign Earned Income Exclusion (FEIE) 

The Foreign Earned Income Exclusion allows qualifying U.S. expats to exclude some or all of their foreign income from U.S. taxation. The following key restrictions apply to the FEIE for American expats primarily living and working in Germany: 

• Only earned income (salary, self-employment) qualifies for the FEIE, AND 

• There is a cap (2025: 130,000 USD, adjusted annually for inflation) on your foreign earned income that can be excluded from taxation in the U.S., AND 

• You either meet the “Bona Fide Residence Test” or the “Physical Presence Test”: 

• Bona Fide Residence Test: You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. This means you have established a residence in a foreign country and intend to live there for the foreseeable future.  

• Physical Presence Test: You must be physically present in a foreign country for at least 330 full days during any period of 12 consecutive months. The 330 days do not have to be consecutive, but they must fall within a 12-month period. 

As a result, your income earned as an American expat in Germany may be entirely excluded from taxation in the U.S. In some cases, the FEIE combined with the U.S. standard deduction can even eliminate U.S. taxation on income that remains U.S.-source for technical purposes, whereas the FTC method would still include that income in the U.S. tax calculation. 

Option 2: Foreign Tax Credit (FTC) 

The Foreign Tax Credit works differently. Instead of excluding income, you: 

1. Report your full worldwide income in the U.S., and 

2. Claim a credit for income taxes already paid to Germany 

Since German income tax rates are often higher (maximum tax rate in Germany 42%, in some cases even 45%) than U.S. tax rates, the credit usually offsets all U.S. tax. As a result, your income earned as an American expat in Germany will not be subject to additional taxes in the U.S. However, applying the FTC may have a significant benefit compared to the FEIE: you keep access to U.S. tax benefits, such as child tax credits. On the other hand, because income remains fully taxable in the U.S. before credits are applied, the FTC method can still result in a residual U.S. tax in situations where the German tax burden is low, or where income is treated as U.S.-source and not offset by sufficient foreign tax credits. 

Key Difference — Exclusion vs. Credit 

Feature	FEIE	Foreign Tax Credit
Method	Excludes income earned in   Germany from U.S. taxation	Credits German tax against U.S. tax
Low-tax countries	Often preferential	Additional U.S. taxes may be due
High-tax Germany	Often less advantageous	Usually more advantageous
Affects other tax benefits	Yes (negatively)	Usually preserves them
Impact on Child Tax Credit	Eliminates eligibility	Usually preserves eligibility

Prinz.tax expert tip for American expats living in Germany: In some cases, the FEIE can produce a lower overall U.S. tax result than the FTC, particularly where the standard deduction eliminates remaining taxable income or where foreign tax credits cannot be fully utilized. In our experience, the Foreign Tax Credit is usually the preferred method to take advantage of the tax treaty between the United States and Germany. Let’s find out why! 

Why the Foreign Tax Credit Is Often Better for Families 

Many of our clients who are American expats in Germany have children. This is where a strategic application of the FEIE vs. FTC method becomes important. 

The U.S. Child Tax Credit can significantly reduce U.S. taxes and may even create refunds. If you use the Foreign Earned Income Exclusion, your U.S. taxable income is reduced, in some cases to zero. Using the FEIE method can limit or eliminate the Child Tax Credit. 

In contrast, under the Foreign Tax Credit method, your foreign income earned in Germany remains taxable in the U.S. When the FTC is applied, the U.S. tax liability is determined based on the worldwide income, and then in a second step, German taxes are used to offset the U.S. tax liability. You may still qualify for the Child Tax Credit after application of the FTC. 

Our recommendation for U.S. families living in Germany: For families with more than one child, this can mean thousands of dollars difference per year. 

When FEIE May Still Make Sense 

FEIE may still be useful if: 

• You live in a low-tax country. 

• You have very low income. 

• You do not qualify for significant tax credits. 

• You want to simplify U.S. tax reporting. 

• Your income is paid from the U.S. or treated as U.S.-source, and you benefit from the interaction of the FEIE with the standard deduction. 

Prinz.tax practical observation: For most of our U.S. clients living in Germany, we have determined that the FTC approach is more advantageous. Germany is considered a high-tax country by U.S. tax standards, which is why the Foreign Tax Credit often leads to better results than the exclusion method. 

How Does the Tax Treaty Germany – USA Impact the Tax Filings? 

The tax treaty between Germany and the United States primarily coordinates the taxing rights between the two countries. That means, it is meant to allocate your worldwide income to be primarily taxed by either Germany or the United States. 

Important Note: The treaty does not remove the obligation to file German or U.S. tax returns. Some expats believe if they pay taxes in one country only, they do not need to file a tax return in the other country. This is incorrect. Usually, American expats living in Germany are required to file a tax return in both Germany and the U.S. 

FAQ: U.S. Taxes for Americans Living in Germany 

Can I use both FEIE and FTC? 

Yes, but not on the same income. 

Do I still have to file a U.S. return if I pay German taxes? 

Yes. The filing obligation remains. 

Which is better if I live as an American expat in Germany: FEIE or FTC?

Often the FTC, because German taxes are high and tax credits remain usable. 

How does the application of the FEIE or FTC affect my taxes in Germany? 

The method used in your U.S. tax return does not impact your German tax declaration. Germany applies its own double taxation relief methods for expats under German tax law. 

Key Takeaways for U.S. Expats in Germany 

• If the tax treaty and U.S. tax rules are consistently applied, you will usually not pay taxes twice on your German salary 

• You must still file U.S. tax returns annually on time. Note that as an expat you will likely benefit from an automatic two-month filing extension. 

• You can reduce U.S. tax via either the Foreign Earned Income Exclusion, or the Foreign Tax Credit. 

• For many American families living and working in Germany, the Foreign Tax Credit leads to better results, especially because of the Child Tax Credit.

Professional Planning Matters 

Choosing between FEIE and FTC is not just a technical reporting detail. The best method can affect your eligibility for using tax credits and claiming tax refunds. The optimal choice can vary from year to year depending on income type, sourcing rules, exchange rates, and available tax credits. 

For U.S. citizens living in Germany, a coordinated and integrated approach to German and U.S. tax filings not only ensures tax compliance but also ensures that your tax position is optimized. Prinz.tax supports American expats living in Germany with integrated cross-border tax services. Our U.S. tax filing service is currently available exclusively for clients of Prinz.tax Steuerberatung GmbH who are already working with us on their German tax matters. The U.S. tax filing service is provided through our affiliated firm, Prinz.tax International GmbH, based in Zug, Switzerland.  

To ensure consistent quality and avoid double taxation, we have developed a two-step approach that ensures accurate and tax-efficient reporting in both Germany and the U.S.:  

1. We first prepare and file your German tax declaration. This allows us to accurately determine your income, foreign taxes paid, and optimize deductions. When completed, our service team will inform our US tax team and provide access to your information and documents.  

2. Afterward, we prepare and file your U.S. federal tax return, using the data from your German tax declaration and by addressing additional information needs. If we determine that the FTC is the more beneficial method to avoid double taxation, we will apply the German taxes from the German tax declaration as a tax credit. Note: If you would prepare the U.S. tax return first, you would need to file an amendment of your U.S. tax return after receiving the German tax assessment.