German income tax happens to be progressive and starts from 1% with continued increments of up to 42% payable by each person working in Germany.
The German income tax system – What to expect living in Berlin?
The German income tax system is designed in such a way that any person earning money within the country’s border is required to pay tax. Authorities in the country have designed a progressive tax rate which continues to rise as your income tax bracket rises. Often, the tax is paid via tax deductions made by an employer. For those who are self-employed/run personal businesses, or work in multiple professions, the federal government expects them to submit yearly tax returns.‘Einkommensteuer’ is the German equivalent of income tax. This kind of tax has to be paid over twelve months. This method of payment is called Lohnsteuer or ‘wage tax.’ One calendar year makes up for a single German income tax year. Workers have an option to either seek professional help from tax advisors in Berlin or file the tax returns on their own. As of 2019, all individuals who use the Elektronische Steuererklärung, ELSTER (electronic tax declaration system) to file their taxes, have up to 31st July to do so.It’s possible to request an extension if some of your documents are not yet in order, or if you are unwell. In such a case, the deadline will be pushed to 30th September instead. For Germans who opt to seek professional advice from tax advisors, the deadline will be extended to March 31st the following year. It’s considered mandatory to file your annual German income tax returns if:
- The tax office has reached out to you asking you to file your tax returns
- You run a business/are self-employed
- You are interested in applying for tax deductions
- You have multiple income sources
- You have been receiving welfare benefits, e.g., unemployment benefit, child benefit, maternity pay, or sickness benefit
- Certain cash was received from abroad in the form of an income
Once the German income tax declaration form is submitted, you get to learn whether the tax amounts paid were less or too much. From this, you will also become aware whether you are entitled to a refund or not. If you are employed, there’s no need for you to file a tax declaration. The only time this will become necessary, is when you earn an income from other sources, other than your place of employment.
Which Types of Earnings Are Subject to German Income Tax in Berlin?
Any money generated from one or more of the categories listed below is categorized as taxable income:
- Annuities, alimony or gains made from personal transactions
- Employed income including any compensation you may have received from previous employers
- Capital investment
- Certain tangible movable property and immovable property
- Income from self-employment
While several kinds of income tax may be exempted from taxation, authorities still use them when establishing the applicable tax rate. Tax-exempt income statuses include maternity leave payments, unemployment benefits, and various incomes already taxed in the originating country (they are exempted to prevent cases of double taxation).
Taxes on Employment Benefits
When it comes to German income tax, the rule of thumb is that all remuneration and benefits received by an employee are all viewed as taxable income. As such, this will apply to all of the following:
- Payments for school tuition and other education-related fees
- Housing offered by the employer/ housing allowances
- Cost of living allowances
- Expatriate premiums
Taxes on Investments and Savings
Investments and savings are also subject to German income tax regulations. Under these rules, global investment income is charged at a rate of 25%. The rate is charged together with a church tax, and a 5.5% solidarity charge where applicable. Authorities have also instituted a standardized yearly deduction which can be counterbalanced using the global investment income. If you are a single taxpayer, the amount is €801 while couples are expected to part with €1,602.
Taxes Applied on Rental Incomes
Any income earned from leasing a home or flat is also subjected to German income tax. However, the income may be exempted if it falls under the double taxation treaty.If you are a landlord, you will need to file a tax return each year indicating the amount earned during the previous year. Apart from the tax on the rental income, a 5.5% solidarity surcharge is also levied on this income. Landlords are allowed to deduct improvement and repair expenses, maintenance costs, and mortgage income expenses from the amount earned from the property.In case you are planning on selling a buy-to-let asset, capital gains tax may have to be paid on the profit derived from this sale. This applies to property owners who have owned the asset in question for ten years or less.
Applicable German Tax Brackets in Berlin
‘Lohnsteuerklasse’ or in English, the tax bracket gets to govern the value payable as Kirchensteuer (church tax), Solidaritätszuschlag (solidarity surcharge), and Einkommensteuer (income tax). The tax bracket also has an impact on the value assigned to various social benefits, e.g., maternity leave and social security.In Berlin, there exists a total of 6 German income tax brackets. A person’s family status and the number of jobs they have gets to determine the tax bracket they will fall under. The tax bracket will change as the personal circumstances continue to change.When it comes to the tax classes, your marital status gets to determine where you will be placed:
- Class I—Applicable to unmarried or single people; those who were married, divorced, or widowed; those who are living in a civil registered partnership unless they have been placed under tax classes II, III, IV.
- Class II—Applicable to single parents residing alone with their kid(s) and who benefit from child allowance or any other form of assistance offered by the government.
- Class III—Provided upon request to married individuals living as a couple in the country and where one party is the sole breadwinner. It can also apply where one of the partners opts to be classified under class V. This class is also applicable to widowed employees, and comes into effect a year after the death of their spouse.
- Class IV—Applicable to married employees living together and who haven’t selected Tax Class III or V for either of them.
- Class V—Applicable to individuals whose partner/spouse falls under Tax Class III
- Class VI—This particular German income tax class is optional. It applies to any person who has more than a single source of income and who still earns money from other places of work. Such a taxpayer is likely to have more than a single Lohnsteuerkarte which is a result of having many jobs.
While these are the most common tax brackets, you should understand there is a possibility of having numerous tax class permutations and family models. If unsure of where you fall, consider consulting with a German income tax advisor or with the tax office.
German Income Tax Rates
For this year (2022) the tax office has raised the taxable incomes by a small margin as follows:
- Taxable income less than €9,984 (for married couples €19,968) is exempted from taxation
- From €9,985 (€19,970) to €58,596 (€117,192) taxed at a rate of between 14% to 42%.
- From €58,597 (€117,194) all the way to €277,825 (€555,650) taxed at a flat rate of 42%
- Amounts over €277,826 (€555,652) taxed at a flat rate of 45%
As of 1 January 2021, the application of the solidarity surcharge tax has been substantially reduced. No solidarity surcharge is levied any longer for individuals filing separately and having an income of €62,000 (€124,000 for married couples). A sliding scale is used so that the top 5.5% solidarity surcharge would eventually only apply in full for individuals filing separately and having a taxable income of approximately €96,850 or married filing jointly and having a taxable income of approximately €193,700.
How to Pay German Income Tax
It’s up to an employer to deduct the amount due from your earnings and remit it to the tax office. If interested in learning more about how much money you will need to pay in the form of income tax, make sure to use the tax calculator provided by the German Finance Ministry.An employer is also expected to make deductions for their employees’ contributions to statutory social insurance schemes, e.g., healthcare insurance, pension, unemployment, and care directly from their earnings.When looking to submit the income tax declaration, you can do so by obtaining forms from the local tax office or by visiting the BZST website and printing them. You will then need to post them after duly filling all the sections. There’s also an option for you to fill the tax declaration form via the web. ELSTER which means electronic tax declaration (‘Elektronische Steuererklärung) is an official tool provided by the German government to assist its citizens in submitting tax declarations. The tool is encrypted so you never have to worry about your documents getting intercepted by hackers.
You Need a TAX ID to Pay Your German Income Tax
Any person residing in Germany is expected to have a Steueridentifikationsnummer also known as the tax identification number.It’s made up of 11 digits which you will need for the income tax to be processed. The TAX ID must feature in all the communications, declarations, and applications you send to the tax authorities.Read our complete guide on Getting a Tax ID in Berlin.
Tax Allowances, Deductions, and Refunds
A German financial year runs from January to December. When the financial year comes to an end, you can proceed to submit your tax declarations to the tax authorities. The Federal Central Tax Office gets to determine whether you are eligible for a refund depending on the amounts paid as income tax in the past year, deductions being claimed, and the figures both you and your employer have supplied.Statistics indicate that around 9 out of every 10 German taxpayers receive a refund after submitting their tax returns. The tax system put in place by the authorities allows for numerous deductions which when applied help to greatly reduce your overall tax liability. Individuals can also claim tax credits such as child benefits.
Income Tax Allowances for Self-Employed Individuals
Self-employed individuals are subjected to the €9,984 allowance put in place for the formally employed personnel. It’s also possible for you to reduce your annual tax bill by counterbalancing your income with the outgoing costs. This can include accounting services, stationery, and work-related travel. It depends on your line of work.Interested in working as a Self-employed or freelance in Berlin? Read our guide on Getting a Freelance Visa in Berlin.
Deductions for Expatriates
The German income tax system hasn’t specified any notable deductions for expatriates. All they need to do is to establish whether they are likely to end up paying taxes twice.By the start of 2020, Germany had entered into 96 bilateral agreements with various nations such as the UK, Ireland, the USA, Australia, and New Zealand.The agreements are meant to ensure that foreigners will not have to pay taxes in their home countries and Germany.
Tax Penalties in Germany
You risk having to pay a fine of up to €50,000 if you fail to declare your annual income or are late in submitting the declaration. 0.25% of the entire assessed tax, is applied as a fine for each month you fail to submit your returns.