global Tax The Church and Worship Tax – Are You Claiming Your Foreign Tax Credit? April 08, 2021 Did you pay Church and Worship Taxes? Did you claim them as a foreign tax credit on your Federal income tax return? Here’s what you should know. Did you know that the church tax is allowed to be claimed as a foreign tax credit? If you pay church and worship taxes you’ll want to make note of how this impacts you. What is the church tax? The First Amendment to the United States Constitution reads, “Congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof…”. More commonly, citizens of the United States refer to the Thomas Jefferson paraphrase of “Separation of Church and State”. Although the U.S. has made that determination, other countries have not. Several countries collect a “church tax” to provide financial support for religious organizations, including the salaries of clergy and operating costs of the church. Where does the foreign tax credit come in to play? As we’ve discussed in prior blogs, the foreign tax credit is a non-refundable tax credit for income taxes paid or accrued to a foreign country or U.S. possession if you are subject to U.S. tax on the same income. The Church Tax is compulsory and based upon your income, therefore it is allowed as a foreign tax credit. Individuals residing in European countries, specifically the following, may be able to take advantage of an additional foreign tax credit that may have been overlooked previously. AustriaDenmarkFinlandGermanyIcelandItalySwedenSwitzerlandFor purposes of this blog, let’s take a look at Germany’s and Switzerland’s church taxes and how the foreign tax credit comes into play. In Germany, for example, “Kirchensteuer” (Church Tax) or “Kultussteuer” (Worship Tax for non-Christian religious bodies) is imposed on the members of Catholic, Protestant and Jewish houses of worship. The tax ranges between 8% and 9% depending on the respective state. The 8% or 9% tax is levied on top of your total tax liability. For example, if your tax liability is €50,000, the 8% tax levied would be €4,000, for a total tax of €54,000. In Switzerland, the Church Tax is slightly different as each of the 26 Cantons (states in the Swiss Confederation) have different tax rates, and taxes. In almost all Cantons, the parishes of the three national churches, Protestant, Roman Catholic, and the Christian-Catholic churches, levy a tax on members and some legal entities. These taxes are compulsory and are based upon your income. Accordingly, as a U.S. taxpayer, you can claim these taxes as a credit on your Federal income tax return. What is the benefit of this? Taking advantage of this tax credit puts more money in your pocket. Providing your tax preparer with your respective country’s tax return, will allow them to thoroughly examine the return and discover what may or may not be allowed as a foreign tax credit. If you have any questions or need assistance with your domestic and international tax affairs, please contact our International Tax Services team. KLR’s International Tax Services team can help you navigate the complex U.S. tax laws and cover international matters to ensure you are claiming all the credits and deductions to which you are entitled.
