I have been asked to write about personal income taxes in Germany and the German tax system a few times. Things get complicated with taxes when you are an immigrant, like an NRI from India with income in India and work in Germany. How do you then pay taxes in Germany and file tax returns? Do you hire a German tax consultant or do it yourself? Lets try to break it down to the basics.
Tax Rates in Germany (2020)
Germany has a concept of progressive taxation, simply put the tax rates go upwards the higher your income is.
|Income (Single)||Income (Couples)||Tax Rate|
|Less than 9,408 euros||Less than 18,816 euros||0%|
|9,409 – 57,051 euros||18,817 – 114,102 euros||14%|
|570,052 – 270,500 euros||114,103 – 541,000 euros||42%|
|More than 270,000 euros||More than 541,000 euros||45%|
As a couple, the tax limits are doubled because taxes are calculated as a household. This tax rate is not complete it inself, apart from this your payslips will also have entries of Kirche Tax(Church Tax 8-9%) and Soli(Solidarity Surcharge at 5.5%).
Other Essential Charges which aren’t Tax
Apart from the tax payments each month, you also pay for Health Insurance (Krankenversicherung), Pension Insurance (Rentenversicherung), Disability and Unemployment Insurance (Pflegeversicherung & Arbeitlosenversicherung). The impact of all these payments is on your take home pay (nettolohn) which dwarfs when compared to your gross pay(bruttolohn).
So, how do you optimize your tax payments such that your take home pay isn’t tiny?
Tax Classes in Germany
Enter Tax Classes. If there is a concept which I have seen people confused with, it is the selection of tax classes. So here are two key principles to understand:
Principle #1: A tax class does not change your overall tax due to Finanzamt for a given year, that number is calculated based on your income level and applicable tax rate.
Principle #2: A tax class only changes your tax prepaid each monthto Finanzamt. So if you pick aggressive tax class, you get lower payslip now and a higher tax return at the end of the year. If you choose to pay too little tax now, the payslip is higher but at the end of the year you might have to pay back to Finanzamt.
- Class I = single/separated
- Class II = single parent
- Class III = married and spouse has no income or lower income
- Class IV = married and similar income to spouse
- Class V = opposite of class III, i.e. this is the class your lower earning spouse has if you have III
- Class VI= Employees who receive income from other employment
Most of the time classes are allocated by default, it is usually the Class III/V combination or Class IV where there is some choice to be made.
International Income and Double Taxation
If you have invested in your home country, then what is the impact on taxes? The answer to this is to first check if there is a Double Taxation Agreement between Germany and your country (you can see this here). The goal of such an agreement is to reduce taxes to be paid on the income earned, so that you do not end up paying taxes in both countries.
DTAA means you do declare your income from all sources in Germany and will get reductions in taxes in either Germany or your country. The actual rules will be as per the agreement and might need more digging into.
Now I can speak a little more for Indians living in Germany who have investments in India, you need to read this link.
Filing tax returns
You are supposed to file tax returns for the current year in the next year July 31. For example; for 2020 you should file returns by July 31, 2021
Tax returns are allowed retroactively, for the very first time, for upto 4 years. Finally, returns are made to a tool called as ELSTER.
You can choose to use software tools like wundertax, steuergo or have a tax consultant help you.
It takes a few weeks to get confirmation from Finanzamt, and the amount is usually transferred by the time you get your confirmation. In case of discrepancies, Finanzamt can ask you to submit more proofs.
Who needs to file tax returns?
If your income was more than minimum levels (above) in the year and if
- Of course, to get returns on the excess tax you have paid. Adjustments on childcare, travel costs to work, trainings you paid for or work from home allowances can be claimed back.
- There is income in another country during the financial year for you
- You are married and one spouse has opted for tax class (Steuerklasse) III or V
- The tax office (Finanzamt) has granted you an allowance (Freibetrag) on the employment tax statement.
- There is income or benefits like parental or maternity leave payments.
- You have received extraordinary income, such as severance payments for which your employer retained employment tax.
- You have more than one employer at the same time (excluding mini-jobs).
Do you have more questions on Income tax in Germany? If yes, please leave a comment.