US military income treatment in D split
September 22, 2011 | 20,00 EUR | answered by Oliver Burchardt
I am a German citizen, my husband works in Germany, the employer is Defence Finance in Cleveland. As a result, he submits his tax return Form W2 Wage and tax statement in the USA and pays taxes there. How do I treat the income for our joint assessment here? Is the salary subject to progression clause, and if so, is it based on the taxable income according to the tax assessment or the gross income? Can the foreign tax be credited to us? Or will his salary not be considered at all and we will get splitting? We both live together in Germany.
Dear inquirer,
Thank you for your inquiry, which I would like to answer as part of an initial consultation.
Please note that the tax assessment is based on the information provided. Changing, adding, or omitting information may alter the result, possibly significantly.
In answering your question, I assume that your husband is a US citizen and therefore taxable in the US on his worldwide income.
According to Article 19 of the Double Taxation Agreement between the USA and Germany, income derived from public employment can only be taxed in the state where it is paid (assuming that Defence Finance is a government agency). Therefore, Germany does not have the right to tax this income in your case (although the exception in Article 19 (2) (b) may apply if your husband is in Germany for reasons other than employment). However, in Germany, the progression clause applies to this income.
You should enter your husband's income that is not taxable in Germany in Annex AUS, line 36. Please note that you must also complete and submit Annex N for your husband's income (enter the gross income in line 21).
However, you should consider whether the option for separate taxation is more advantageous for you, as your husband does not have taxable income in Germany. The additional tax burden from the progression clause may be higher than the savings from the splitting advantage.
I hope I could be of assistance to you in your inquiry.
Kind regards,
Oliver Burchardt
Tax advisor
