The ins and outs of income tax

Filing taxes is never fun, but in a foreign country it can be downright daunting. Joe Morgan sifts through the German tax code so you don’t have to.

The ins and outs of income tax
Photo: DPA

If you live in Germany with the intention of staying at least six months you will be considered a resident and have to pay income tax. Just how much tax will fall into the clutches of the Finanzamt will depend upon a variety of factors, including whether you are married or not and how many children you have. Unlike in other countries such as Britain, the tax year in Germany matches that of the calendar year.

If you work as an employee in Germany, managing your taxes is not such a burden. Employees automatically have their income tax deducted from their monthly salary. Single people earning an annual taxable income less than €8,000 are exempt from tax while married couples earning less than €16,000 a year also do not have to pay tax on their income. A sliding scale, marginal tax rate is levied on anything higher.

A single person in 2010 on an annual income of €8,000 paid a marginal tax rate of 15.8 percent, rising to 19.5 percent at €11,000, 24.7 percent at €15,000, 27 percent at €20,000, 31.5 percent at €30,000, 36.1 percent at €40,000 and 42 percent at €60,000.

High net-worth individuals with an income of €500,000 or more pay the top-rate tax of 45 percent.

An income tax burden can be reduced via a variety of tax deductions, including certain types of insurance premiums, political contributions, donations to charity and expenses incurred in extraordinary circumstances such as illness. Children under the age of 18 or young people under the age of 27 attending college without earnings are also eligible for deductions.

Sonderausgaben [private expenses] can be deducted. For example, pension insurance policies and health insurance policies, which is very important. Health insurance is often for a freelancer about €250 a month. You can also deduct doctor costs – but they would have to climb over a reasonable burden – child care costs and other costs such as extraordinary expenses, that are mostly in the private area,” explained Matthias Gust of Gust & Martini, a tax advisory firm based in Berlin.

The Lohnsteuer, a wage tax which forms part of the Einkommensteuer (income tax), is collected at source and paid directly to the Finanzamt by an employer. Germany has two categories of employees: formal employees, who are obliged to pay a salaried wage tax, and those obtaining their salary from an employer based in another country. In this case, the salary is surcharged from a foreign entity to a German entity once the salary has been paid to the employee. “If a foreign employer cross-charges salary to a German employer, the German employer is obliged to withhold wage tax on behalf of the expatriate,” said Michael Kemper, a tax partner at Ernst & Young in Stuttgart.

Tax classifications

Germany uses a classification system to determine a salaried employee’s tax burden. Almost all single taxpayers without dependants will be put in Steuerklasse I. Married couples with one primary earner, however, can lower the amount of tax deducted from their wages by selecting a combination of Steuerklasse III/V. This is usually beneficial for those filing a joint return using the Ehegattensplitting procedure, which splits the combined income of the couple in two equal sums and can lower the primary earner’s overall tax bracket.

Germany is currently in the process of replacing its antiquated paper wage tax cards (Lohnsteuerkarte), which contain information such as a person’s tax class and child deductions, with an electronic version. Going by the clunky German abbreviation ElStAM for Elektronische Lohnsteuerabzugsmerkmale, it is supposed to mean less paperwork for both employers and the tax office. Employees can also control some degree of how much personal information their company can access – such as whether they have recently married.

And unless you are keen on state-organized tithing, be sure to opt out of your church tax known as Kirchensteuer, which can cost up to nine percent of your wages.

Unlike countries such as the United Kingdom and the United States, Germany does not have a self-assessment tax system. Those who are self-employed (selbständig) or obtain rental income from a property or investment income fall under the Einkommensteuer. While the Lohnsteuer is collected at source and paid directly to the tax office by an employer, those liable for Einkommensteuer are responsible for paying their taxes themselves.

Taxpayers filing income tax under the Einkommensteuer rules will have their tax return computed by the Finanzamt. Items on a tax return may be questioned by the tax office and require follow-up correspondence such as supporting documentation for deductions.

The Finanzamt automatically calculates a person’s tax burden, based upon their earnings in the previous year. The benefit of this is that during the tax year there is not a need to provide the tax office with any details of income. If a taxpayer has a lower – or higher income – than the previous year he or she can apply for a reduction – or increase – in the amount of tax liable to be paid.

Paying in advance

Taxpayers are required to make prepayments (Vorauszahlungen) normally on a quarterly basis on March 10, June 10, September 10 and December 10. The total amount of tax liable to be paid will be calculated after an income tax return is completed, which includes all sources of income. Wage tax withholding as well as provisional payments are deducted from this total tax liability so that a refund or final tax payment is assessed.

Once a tax return has been filed, a tax assessment is usually issued by the Finanzamt between one and six months afterwards. No payment will be due before the Finanzamt registers receipt of the tax assessment notice. An income tax return (Einkommensteuererklärung) should be filed by May 31 of the year after the one in which the income was obtained.

“The only advice for expats should be to look for a tax consultant, particularly if they still have a foreign income. In Germany there are a lot of possibilities for applying for reductions in a tax bill. You have to know them,” said Kemper of Ernst & Young. “Those on a self-employed basis who still have rental or investment income from other countries, will have to look at the double tax treaty in order to know if it is tax exempt in Germany.”

In some cases, expats with a foreign-sourced income may have to pay tax even though the income is less than the personal allowance threshold. “An expat with a low income of €7,000 who obtains a higher income in another country will have to include this in their tax return. The effect could be that he or she loses the €8,000 tax-free allowance and there could still be tax to pay,” said Kemper.

Those who enlist the services of a tax consultant obtain an automatic extension and have until September 30 to file their return. Tax returns filed after these two cutoff dates can incur penalty interest rate payments. A tax adviser will be able to obtain a further extension until December 31 on behalf of a taxpayer by filing an individual extension.

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Germany and France extend Covid tax breaks for cross-border workers

Germany and France have agreed to extend the relaxation of tax rules for cross-border workers until the end of the year.

Cross-border workers commute by car but they can for now continue to work at home
Cross-border workers usually have to commute but can for now continue to work at home.. Photo: Fabrice Coffrini / AFP

The agreements between France and the governments of Belgium, Luxembourg, Germany, Switzerland and Italy avoids double taxation issues for anyone travelling across the French border to or from those countries in order to work.

During the pandemic, tax rules were eased to allow French cross-border employees, like their counterparts in Belgium, Luxembourg, Germany, Switzerland and Italy, to work from home without having to change their tax status.

The deals, which were established at the beginning of the health crisis in March 2020, were due to end on September 30th – and would have plunged cross-border workers still working from home because of the health crisis into renewed uncertainty over their taxes.

The latest extension of these agreements means there’s no confusion over where a cross-border worker pays their taxes until December 31st – for example cross-border workers who work in Geneva but live in France, who normally pay their taxes and social security contributions in Switzerland. 

Under normal circumstances, anyone living in France who works in Switzerland can spend no more than 25 percent of their time working from home. If they exceed this time limit, they would have to pay these tax charges tin France rather than in Switzerland, which would be much higher.

The agreements between France and Belgium, Luxembourg, Germany and Switzerland “provide that days worked at home because of the recommendations and health instructions related to the Covid-19 pandemic may … be considered as days worked in the state where [workers] usually carry out their activity and therefore remain taxable,” according to the statement from the French Employment Ministry.

In the case of Luxembourg, days worked from home because of the health crisis are not counted in usual the 29 day limit.