Taxes for Americans Living in Denmark
The US government taxes international income earned by their permanent residents and citizens residing in Denmark. If you are a US expat and you live in Denmark, it is mandatory to file a form 1040 every year to the IRS. Apart from the typical income tax return, many people must also submit returns disclosing assets that are held in foreign bank accounts. You also have to include on your US tax return any income you may have that is taxed in Denmark. Therefore, tax return filing is required even if they are not owed.
However, there are a few ways to avoid double taxation. Following proper tax planning to prepare a tax return should allow you to use these provisions and other strategies to eliminate or possibly minimize tax liability. Although US taxes are due by 15th April, expatriates get an automatic extension until 15th June, which can be extended further until 15th October. Get in touch with us at Universal Tax Professionals to receive the best US expat tax services to all US citizens living abroad in Denmark.
Danish Social Security System
The Danish tax authority is known as Skatteministeriet. Virtually, almost all of the Social security system in Denmark is funded by the income tax system. Each month, all employers must contribute DKK180 and employees must contribute DKK90 to the Danish Supplementary pension scheme.
There are two tests for defining residency in Denmark. When someone meets either of them, they are seen as a resident in Denmark. The first test is how long you have been in Denmark. If you have stayed for at least 6 months or more in Denmark, then you are considered a Danish resident. If you have a residence in Denmark on a permanent basis, then the second test is met. Denmark residents have to pay taxes on their global income. Nonresidents have to pay taxes only on their income sourced from Denmark.
Danish residents have to pay tax on their worldwide income anywhere between 12.14% and 55.89%, which includes national taxes, labor market tax, church tax, and local taxes. The tax rate varies because of the different municipality tax rates. Apart from this tax, the health care tax of 8% continues to be payable. Denmark has a value-added tax of 25% on most goods and services. While the US tax year is the same as the Danish tax year, in Denmark, the deadline in most cases for filing your tax return is May 1st of each year.
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Denmark - US Tax treaty
The United States of America and Denmark have had a tax treaty since 1948 but updated their agreement effective 1st of January 2001 thereby replacing their old treaty. This current treaty sets the tax rates for certain types of income, protects both countries’ citizens from dual taxation, and shares information about the financial dealings of their taxpayers.
The totalization agreement between the US and Denmark also sets forth the rule on which country’s tax system to follow. If you are a US expatriate living in Denmark, it is important to consider the US – Denmark tax treaty rules to determine whether you need to pay social security taxes in the US, or Denmark, or both. Whether your job in Denmark is for a Dane company or a US company is the main determining factor. The US Social security administration website has the details and summary of this totalization agreement.
The FATCA regulations stipulates that both US taxpayers and banks who hold their assets must report any balances of foreign assets worth $200,000 or more as of year-end, excluding your home, or any balances of $300,000 at any point in the year. For expatriates couples who are married, these thresholds are higher. You must file them with your US taxes and report them using Form 8938.
Exemptions and Deductions
If you are a US expatriate living in Denmark and if you pay taxes in Denmark, many exemptions entitle you to pay less or no income tax on the same income in the US. Taxes may be reduced by deductions and tax credits related to your income in Denmark. The Foreign earned income exclusion entitles you to exclude the 1st $112,000 of income from your US taxes on your 2022 return. The expatriate scheme allows expatriates who earn a $9,000 salary monthly in Denmark to pay a flat rate of 32.84% for up to 7 years. In addition, there is a structure for expatriate taxes who are considered either researchers or highly paid. These people can choose to pay taxes at 26% of their salary for the initial 5 years they are in Denmark if some qualifications are met. If necessary, these exemptions can be combined.
Information Sharing Between Denmark and US
The Danish and the US governments exchange taxpayer details, and Danish banks pass on information about US account holders to the IRS. Hence, it’s not worth omitting or not filing anything on your return. The consequences for incomplete or incorrect filing for expatriates can be harsh, to say the least. If you are a dual citizen, a US citizen, or a green card holder, and you have been residing in Denmark, but forgot to file a tax return in the US, there’s a program known as the IRS Streamlined Filing Procedures, which allows expats to catch up without paying any penalties. Let us know if you have any questions about getting caught up with your taxes.