Knowing one's tax status both in Germany and at home is immensely important for expatriates, particularly for people receiving an income in Germany. Income tax is paid by residents throughout the fiscal year, typically via employers who deduct tax through the payroll system. At the end of the financial year, tax adjustments are made to determine potential over- or underpayments.
Single people with a taxable income of less than €8,354 and married couples with an income under €16,708 pay no tax according to taxation rules for 2014 or 2015.
Individuals with an income of €52,882 and couples with an income of €105,764 are taxed at a rate between 14% to 42%, with the rate progressively rising at certain thresholds. . Individuals earning from €52,882 to max. €250,730 and couples earning from €105,764 to max. €501,460 are taxed at a rate of 42%. Additionally, a solidarity surcharge is levied at 5.5% of the tax, which is used to fund the reunification of the former West and East German states.
In line with many other countries, German tax authorities permit a range of deductions that can reduce taxable income: households with children under the age of 18 (or less than 27 years, if still without earnings and in full-time education); political and charitable contributions to bodies and organisations based in Germany up to a particular limit; specific insurance premiums; and unavoidable extraordinary expenses above a certain limit, such as illness for example, count as deductible items.
Payments for social programs such as retirement, health insurance, long-term nursing care and unemployment are typically carried in equal measure by employee and employer. The employer's contribution is not regarded as taxable income to the employee and the employee's share is tax deductible up to a specific limit.
Lohnsteuer (Wage Tax)
Any individual subject to German taxation will generally pay tax on most sources of their income. The wage tax or Lohnsteuer is withheld at source from compensation (such as health insurance). Other sources of income, for example self-employment, fees for consultancy or other services or rent from buy-to-rent properties and such, are addressed by the Einkommensteuer (income tax).
Germany's Lohnsteuer is different from Einkommensteuer merely because it is collected differently. Lohnsteuer is collected at source and paid directly to the tax office (Finanzamt) by the employer. An individual is responsible for dealing with their Einkommensteuer privately via their tax return.
Using the last payment for the previous year as a basis, the tax office estimates the tax payable for the current year and demands prepayments (Vorauszahlungen) of a quarter of this tax on 10th March, 10th June, 10th September and 10th December. An income tax return determines the total tax liability for the year, which will include all other types of income from all types of sources. Wage tax withholding and provisional payments are deducted from the total tax liability, before a final tax payment or potential refund can be calculated. Typically, the tax office's assessment is issued between two and six months from the date the tax return is filed. No payment is required until the tax assessment notice has been received.
Income tax returns (Einkommensteuererklärungen) should be filed by 31st May of the year following the one in which taxable income was received. Using a tax consultant gives tax payers an automatic extension to file income tax returns by 30th September. Late returns typically incur penalty fees and interest is charged.
In a few circumstances, tax payers are required to pay taxes despite having an income that is less than the personal allowance. This is especially true for tax-exempt income, for example income sourced in a foreign country, which under the progression clause must be considered for the determination of the relevant income tax rate. Such taxes are assessed based on a sliding scale.
Other Taxes to be considered
Germany boasts ca. 30 different types of taxes, such as inheritance tax, motor vehicle and real estate taxes. A series of sales taxes impact businesses as well as individuals. Of this the majority is for Value Added Tax (Mehrwertsteuer). Mehrwertsteuer applies to goods as well as services and at present the standard rate stands at 19%, with a reduction on certain items such as food, printed matter and exports abroad for example. Kirchensteuer of between 8% and 9% is also payable in addition to the Lohn- and Einkommensteuer; however, this applies only to those officially affiliated with one of the established churches.
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