EXPLAINED: The tax cuts foreign parents in Germany need to know about
From babysitters to moving costs, here are some of the top and often overlooked deductions international families in Germany can make on their taxes.
Whether higher gas costs or forking out more for fruit at the supermarket, daily life in Germany is becoming increasingly expensive. This can be especially true for those who also need to cover the costs of their children and families.
But there are a number of tax benefits in the Bundesrepublik that help keep these fees down.
The Local spoke with Munich-based expat tax advisor Thomas Zitzelsberger about the top tax deductions for parents - including some which international residents in particular frequently overlook.
Kinderfreibetrag vs. Kindergeld
Imagine receiving money every month just for having a child or children. That’s exactly what Kindergeld (child benefits) is: since 2021, parents receive €219 per month for each child up to two kids, €225 for a third child and €250 for the fifth child.
The payments usually stretch until the child’s 18th birthday, and sometimes even their 25th if there are extra Ausbildungskosten (educational costs) for studying at a university or vocational school.
Parents need to apply for this payment through their nearest Familienkasse, and can only retroactively claim the monthly payments stretching back six months.
“Expats tend to think for whatever reason that they’re not entitled to these benefits…and then they tend to be livid that you can only go back six months and everything is lost,” said Zitzelsberger. “It’s a shame really.”
If you receive Kindergeld, you also claim a Kinderfreibetrag (child allowance), which guarantees that the parents’ income remains tax free up to a certain amount.
Unlike with Kindergeld, there’s no application involved - rather the Finanzamt inspects with the so-called Günstigerprüfung (cheaper check) whether an individual or married couple qualifies for a top-off to the Kindergeld they receive.
For 2021 and 2022, the tax deductible amount comes to €5,460, which is either assessed for married couples filing their taxes together or single people.
It does not matter to Germany’s tax office (Finanzamt) whether parents use a babysitter or nanny for a date night or because their Kita (day care) is closed, as long as the payment for the Betreuungskosten (childcare costs) is documented.
Parents can deduct up to two-thirds of their annual childcare expenses per child (up until the age of 14) per year, capped at €6,000. That means the most you can expect to deduct is €4,000 per kid annually.
Whether Kitas or high schools, the vast majority of schooling in Germany is free or heavily subsidised. But what about when you do pay private tuition fees out of pocket? In this case, you can claim up to 30 percent of tuition expenses, at a maximum of €5,000 per child per year.
Yet the Finanzamt strictly sees ‘tuition’ as fees that apply to schooling, not extracurricular activities. "If your child does music classes or football or whatever, that’s your private entertainment and there’s no deduction for that,” said Zitzelsberger.
Referred to as Alleinerziehende (literally 'those raising children alone'), there are about two million solo mamas and papas in Germany.
The government recognises the particularly high financial burden they also bear with a special Entlastungsbetrag (tax credit). As of 2021, single parents can deduct €4,008 from their income plus €280 a month for each additional child.
In some cases, single parents can also deduct Unterhaltszahlungen (maintenance payments) of up to €8,820 per year. This could include, for example, the cost of a room for the child to stay in if they travel between two separate residences.
But the maximum deduction can only be claimed if the parent is not also receiving Kindergeld or the Kinderfreibetrag.
Health and medical care
These expenses can be claimed as long as the Finanzamt sees them as “medically required," said Zitzelsberger.
That does not apply to an over-the-counter tub of aspirin, for example. “However, if you have a doctor’s prescription that says this and this medication is required and your health insurance does not cover it in full, then you can make that claim,” he added.
But there’s a catch. While most other expenses come with the caveat of a maximum deduction, health expenses require a minimum deduction - or two to four percent of your income per year for all medical expenses for both the parent and their children.
A typical medical deduction Zitzelsberger frequently sees for children is dental work. Parents may opt for a special orthodontic treatment on top of the basic tariff that insurance already covers.
If this costs an extra €1,000, for example, parents can claim the deduction.
If a family receives a dream job or opportunity in Germany, and hops on a plane there before they can get rid of their old rental contract, this rent can count as a tax deduction, said Zitzelsberger.
Yet sometimes one family member moves to Germany while the rest stay behind - at least temporarily.
“It is relatively common for the first few months or it is common until the end of the school year and then the rest follows,” said Zittelberger.
To keep costs down, the Finanzamt allows these families to factor in the costs of accommodation for the family member who has moved, plus travel back and forth.
“One of the questions we get often is: what’s the limit on this?,”said Zittelberger. “There is no limit on travel expenses. But they can only travel back and forth once a week”
“Travel expenses” are then defined as anything involved with door to door travel, including the taxi to the airport.
The cost of accommodation in Germany can also be deducted, but capped at €1,000 per month.
If the partner staying back with the children is not working or has a low income in another EU country, their setup is treated with Ehegattensplitting - a mechanism for taxing married couples.
"They can claim all tax benefits that all resident German taxpayers would be entitled to even if they’ve never set foot in this country before."
A good tax investment
In Germany, around the first €10,000 of income is completely tax free. Most parents, however, assume that this can only benefit them directly, and not their offspring.
Yet starting from birth, parents can actually set up a savings account in their child's name. Up to €10,000 of interest - for example that a stock portfolio their child is enrolled in generates - is then completely tax free.
“Many parents pay income tax on these investments every year which are really designed to eventually be given to the children when they’re adults," said Zitzelsberger. "What you could do is give these investments directly to your children."
In the very best case scenario, said Zitzelsberger, this can add up to €180,000 of tax-free income by the time your child reaches their 18th birthday.