Income taxation in Germany

Simply put, income tax in Germany is determined by applying a tax rate to a taxable income. Determining the taxable income involves several steps: First of all, all incomes of a taxpayer are aggregated. Then, certain expenses and any allowances are deducted. The following questions and answers will give an insight into how income tax is calculated in Germany:

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Tax return form

Which types of income are subject to income tax in Germany?
Which expenses can I deduct from tax?
As from what amount of income do I have to pay tax? What is the basic personal allowance?
What is the amount of income tax to be paid?
In addition to income tax, are there any further taxes on income?

 

Which types of income are subject to income tax in Germany?

In the German Income Tax Act there are seven types of income from the following sources:

1. Income from agriculture and forestry
2. Income from commercial business activity
3. Income from self-employment
4. Income from employment
5. Income from capital assets
6. Income from renting and leasing
7. Other income, e.g. income from statutory pensions or income from private sales transactions

If income cannot be attributed to any of these seven types of income (for example, a lottery win) it is not liable for income tax.

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Which expenses can I deduct from tax?

From your income subject to taxation you may deduct any expenses incurred in connection with achieving that income (called income-related expenses or business expenses). For income from employment, these can include e.g. application expenses, travel expenses and relocation costs, the lump sum for travelling between one’s home and place of work or expenses for maintaining two households.

In addition, certain costs incurred for private purposes can be deducted.

Special expenses include e.g. private insurance for basic health care and compulsory long-term care and premiums on other private insurance policies, childcare expenses, school fees, donations to promote public-benefit purposes, church tax paid, maintenance payments to divorced spouses, etc.

Extraordinary financial burdens include any major expenditure incurred for legal, moral or factual reasons (for example, costs borne by the taxpayer as a result of ill health).

In addition, maintenance payments to persons entitled to maintenance and expenditure on vocational training for children can be deducted.

People with disabilities are entitled to a deduction for any higher expenditure resulting directly from their disability. This may either be deducted as a lump-sum disability allowance or – on the basis of evidence provided – the actual expenses incurred.

In addition, tax relief is granted for expenditure on employment or services in or around the household and craftsmen services.

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As from what amount of income do I have to pay tax? What is the basic personal allowance?

Single persons must pay income tax on a taxable income (i.e. their income subject to taxation minus any relevant expenses and allowances) of €8,652 (2016) and €8,820 (2017), respectively. The threshold is doubled for joint filers.
In order to determine your income tax, use the Federal Ministry of Finance’s interactive calculators for wages tax and income tax (in German).

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What is the amount of income tax to be paid?

The basic rate starts at 14% and increases progressively to 42% (the top rate) for a taxable income of €54,057 / €108,114 (single persons / married couples or registered partners). For a taxable income of €256,304 / €512,608 (single persons / married couples or registered partners) and up, the top rate is 45%. This is called the marginal tax rate.

A separate tax schedule applies to income from capital as of 1 January 2009:
As a rule, the tax rate for all investment income generated by private individuals’ investments, such as dividends and interest, but also profits on the sale of securities and futures is 25% of the income (plus solidarity surcharge and (if applicable) church tax). However, in this case, a deduction for actual expenses incurred as income-related expenses is not allowed, only the standard savers’ allowance of €801 (single persons) and €1,602 (for married couples or registered partners assessed jointly for tax), respectively, may be deducted.

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In addition to income tax, are there any further taxes on income?

Further to income tax, there is solidarity surcharge as well as church tax (in case of membership in a religious community that requires withholding of church tax). As a rule, solidarity surcharge is levied at a rate of 5.5% and church tax at a rate of 9% of the applicable income tax assessed as due.

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