Why millions more German workers have to do a tax return this year
The deadline for completing your tax return is fast approaching and millions more German workers are required to fill in their tax return than usual. Here's what you should know.
What are the dates to know?
The tax deadline was extended by three months this year, meaning people who plan to fill in their own tax forms have until October 31st to send in their declaration for 2020.
Anyone who has asked an accredited accountant to do their taxes for them has until the end of May next year to hand in the declaration.
The government extended the deadline as a one-off measure to help people cope with the extra complications brought about by the pandemic.
Who needs to fill out a tax return this year?
Normally, people who are in tax class 1 (unmarried people whose sole source of income is their salary) don’t need to fill in a tax return. The same goes for married people who fall into tax class 4/4.
But things are more complicated this year due to Kurzarbeitergeld.
Anyone who received more than €410 in wage replacement benefits from the state no longer counts as having just one source on income. The state benefits can push people into a higher tax class (more on that later), meaning their income needs to be assessed by the local tax authority.
Normally, this rule applies to people who have been receiving unemployment benefits but have in the course of the year found salaried employment.
READ MORE:
- Everything you need to know about paying taxes on reduced working hours
- German tax deadline extended due to Covid pandemic
Other people who this affects are pregnant women who have received Mutterschutz payments, parents of young children who make use of parental leave payments (Elterngeld), and people who have been off work sick for sustained period of time (Krankengeld).
In 2020 though, some six million more workers fell into the category of receiving state aid due to the fact that they received Kurzarbeitergeld during the tough economic times brought about by the pandemic.
Roughly six percent of the workforce went into part-time work (or stopped working completely) in 2020. In order to ward off a surge in unemployment, the state paid up to 60 percent of their salaries.
That means a lot of extra tax returns for the tax authorities to process this year.
The progression clause
Germany's online tax system. Photo: dpa | Frank Rumpenhorst
The specific reason for why employees who received state benefits need to complete a tax return has something to do with a tax rule called the Progressionsvorbehalt (progression clause).
Essentially, although you do not pay tax on the money received from the state, it counts as part of overall earnings when the tax authority considers what tax bracket you fall into.
In other words, it is added together with your income and that total sum indicates your tax bracket. That tax bracket is then applied to your salaried earnings for the tax year.
In some circumstances this can lead to the tax authority asking you to pay more tax than the amount that was taken off automatically from your monthly pay slip.
The Finance Ministry assures people that demands for back taxes are not a general rule and are highly dependent on the individual worker’s circumstances.
“The receipt of Kurzargbeitergeld does not automatically result in an additional tax payment,” the ministry assures.
“Rather, the concrete tax effects of the progression clause depend on each individual circumstance. These include one’s tax bracket and the amount of income tax paid before the pandemic, the amount of other income subject to taxation, the amount of deductible pension expenses and other deductions.”
Various companies have been set up in recent years that help expats complete their tax forms online in English.
Or, if you want peace of mind, it might be worth asking a tax adviser to do it for you.
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What are the dates to know?
The tax deadline was extended by three months this year, meaning people who plan to fill in their own tax forms have until October 31st to send in their declaration for 2020.
Anyone who has asked an accredited accountant to do their taxes for them has until the end of May next year to hand in the declaration.
The government extended the deadline as a one-off measure to help people cope with the extra complications brought about by the pandemic.
Who needs to fill out a tax return this year?
Normally, people who are in tax class 1 (unmarried people whose sole source of income is their salary) don’t need to fill in a tax return. The same goes for married people who fall into tax class 4/4.
But things are more complicated this year due to Kurzarbeitergeld.
Anyone who received more than €410 in wage replacement benefits from the state no longer counts as having just one source on income. The state benefits can push people into a higher tax class (more on that later), meaning their income needs to be assessed by the local tax authority.
Normally, this rule applies to people who have been receiving unemployment benefits but have in the course of the year found salaried employment.
READ MORE:
- Everything you need to know about paying taxes on reduced working hours
- German tax deadline extended due to Covid pandemic
Other people who this affects are pregnant women who have received Mutterschutz payments, parents of young children who make use of parental leave payments (Elterngeld), and people who have been off work sick for sustained period of time (Krankengeld).
In 2020 though, some six million more workers fell into the category of receiving state aid due to the fact that they received Kurzarbeitergeld during the tough economic times brought about by the pandemic.
Roughly six percent of the workforce went into part-time work (or stopped working completely) in 2020. In order to ward off a surge in unemployment, the state paid up to 60 percent of their salaries.
That means a lot of extra tax returns for the tax authorities to process this year.
The progression clause
Germany's online tax system. Photo: dpa | Frank Rumpenhorst
The specific reason for why employees who received state benefits need to complete a tax return has something to do with a tax rule called the Progressionsvorbehalt (progression clause).
Essentially, although you do not pay tax on the money received from the state, it counts as part of overall earnings when the tax authority considers what tax bracket you fall into.
In other words, it is added together with your income and that total sum indicates your tax bracket. That tax bracket is then applied to your salaried earnings for the tax year.
In some circumstances this can lead to the tax authority asking you to pay more tax than the amount that was taken off automatically from your monthly pay slip.
The Finance Ministry assures people that demands for back taxes are not a general rule and are highly dependent on the individual worker’s circumstances.
“The receipt of Kurzargbeitergeld does not automatically result in an additional tax payment,” the ministry assures.
“Rather, the concrete tax effects of the progression clause depend on each individual circumstance. These include one’s tax bracket and the amount of income tax paid before the pandemic, the amount of other income subject to taxation, the amount of deductible pension expenses and other deductions.”
Various companies have been set up in recent years that help expats complete their tax forms online in English.
Or, if you want peace of mind, it might be worth asking a tax adviser to do it for you.
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