Understand how the German tax system works

Marle

Updated on Oct 22 • 5 minute read

The German tax system strives to balance the burden of taxation as fairly as possible on the shoulders of all taxpayers. Even though Germany almost peaks in the world's highest tax rates, you will find that taxes really benefit the common good. As a matter of fact, you get access to free education, strong social security, one of the best health care systems and well-connected transport infrastructure.

Above all, the German tax system is fair and transparent. Let’s dive into it!

Three pillars form the German tax system

The German tax system is primarily built on three pillars, arguably the most substantial sources of government finance:

  • Income tax
  • Trade tax
  • and VAT.

Fairness and efficiency take top priority in the tax system in Germany. As such, the tax burden is spread over various groups of people whereby the strongest shoulders carry the highest amount. In fact, income tax rates are based on the level of income.

Put simply, those who make more money are also taxed more heavily. On top of that, you only pay your contribution to taxes when you are in a position to do so.

Taxes are only due above a taxable subsistence level of €9,408 per year

So once your salary exceeds the minimum subsistence level for tax purposes, you'll be asked to contribute to the growth of Germany.

First things first: Your tax ID in Germany

One of your first steps upon your arrival in Germany will be your appointment at the Citizens' Office (Bürgeramt) in your new home base. No matter whether you plan to settle in Berlin or Hamburg, you always have to register your new address in Germany at the Bürgeramt within the first two weeks of your arrival.

In the process, you’ll be given a German tax identification number (Steueridentifikationsnummer) so that you have smooth communication with the tax office with your 11-digit number.

In other words: your relationship with the tax office will be based on your tax identification number. And the 11-digit number is also used on your tax return, tax assessment or annual wage tax certificate.

What’s the income tax rate in Germany?

When it comes to income tax in particular, it becomes evident that the German tax system spreads the tax load in the fairest possible manner. Hardly anyone in Germany is exempt from income tax; in fact, this turns income tax into the most vital tax for the state.

Do you ask yourself on which types of income you have to pay income tax? As a rule, you have to pay income tax in Germany on all of the following income:

  • Income in Germany and abroad (Tip: Check the double taxation treaties to avoid paying double taxes)
  • self-employed work
  • non-self-employed work
  • commercial enterprises
  • agriculture and forestry
  • capital assets
  • Renting and leasing
  • and other income mentioned in the Income Tax Act, such as pensions.

Once your annual income exceeds €9,408, you’ll pay income taxes in Germany

More than anything else, the German tax system strives to be one: fair. And so you only have to pay taxes once you have reached a certain income level, ensuring your minimum income for a living is the top priority.

Paying income taxes in Germany for singles start from €9,408 (2020), equivalent to around €784.00 per month. For a married couple, the tax income payments start from €1,568 per month.

Needless to say, you don't pay any income tax on your unemployment compensation, BaFöG, scholarships or parental allowance.

What’s the wage tax rate in Germany? (Lohnsteuer)

When the first salary is paid out in Germany, there are typically disappointed faces; after all, Germany ranks among the world's top countries for its tax rates. There' s only one country with higher taxes: Belgium.

Your wage tax covers a unique form of income tax; the employer automatically deducts this tax when you are paid out, and it's automatically transferred to the relevant tax office.

Oh yes, the drastic drop from gross salary to net salary is a tough hit, however, you need to keep in mind that the taxes are used cleverly and ultimately in your favour: this allows you to jump on punctual buses, ride your bike on smooth bike paths and always have the assurance that the social system will catch you at any time. Not bad, huh?

Although Germany levies almost the highest taxes, there's an upper limit here. For example, the peak tax rate for annual income is €54,950 or €4,580 per month and for married couples with a joint annual income above €109,900.

The top tax rate in the German tax system is 42 percent.

Tax brackets in Germany (Steuerklassen)

Now as you know, taxes in Germany aren't the same for everyone; the tax rate is calculated in relation to income. This means that you’ll have to dig a little deeper into your pockets if you're able to contribute more.

The German tax system includes different tax brackets with different tax rates. This means that the higher your income, the higher the percentage on your taxes.

And so there are six different tax brackets in Germany:

  • Wage tax class 1: For single employees with unlimited income tax liability.
  • Wage tax class 2: For single parents, as an allowance is included here.
  • Wage tax class 3: For married couples whose salaries vary greatly and who opt for the splitting method. The higher-earning partner usually chooses tax class 3.
  • Wage tax class 4: For married couples who earn roughly the same amount.
  • Wage tax class 5: the spouse with the lower earnings chooses the splitting method.
  • Wage tax class 6: applies if an employee has several employment relationships.

Tax refund in Germany

Can you claim your taxes back in Germany? You bet you can! The German Federal Statistical Office reports that

the average tax refund was €1,027 in 2019, and out of 13.7 million taxpayers who have had their income tax assessed, 12 million of these have had their taxes refunded.

You can see for yourself: if you don't file a tax return, you're really giving money away.

In Germany, you can generally claim your taxes back in the following cases:

  • Your annual income is below the tax-exempt amount
  • You have worked part-time or have been employed on a fixed-term contract in Germany
  • You have been misclassified regarding your tax payments
  • You have financially supported your parents or other family members in your home country
  • You have paid rent both in Germany and in your home country
  • You have paid for flights to and from Germany

Church tax, dog tax, cigarette taxes: These are taxes you pay

Whether you're buying groceries at the supermarket, drinking coffee in your go-to café or buying cigarettes at the petrol station, there are taxes to be paid on most purchases in Germany.

Taxes are levied on harmful goods such as cigarettes to steer behaviour through taxation. In short, the state hopes that the tobacco tax will prevent some people from smoking. A dog tax helps, among other projects, to expand dog play areas and other municipal tasks.

For most internationals, church tax causes confusion. Indeed, a church tax is levied on members of various religious communities. If you're a resident of Germany and belong to a religious community, i.e. are baptised, you have to pay a church tax.

This applies to Catholic and Protestant churches, but also to free churches, Jewish communities, the Jehovah's Witnesses and Orthodox churches. To give you a rough idea: in Bavaria and Baden-Würtemberg you pay around 8%, in all other federal states 9% church tax on your annual income tax. You can get an exemption from this by resigning from the church.

How to file your tax return

By the end of the month, your net salary will land on your bank account while your employer automatically deducts income tax and social security contributions automatically from your gross salary and transfers them directly to the tax office. However, you can file your tax return at the end of the year and, with a bit of luck, you’ll get a refund of any overpaid taxes.

Did you know that in 9 out of 10 cases the taxpayer gets money back after filing the tax return?

After all, you can deduct many professional expenses from your tax bill, as well as church tax or other expenses. You can even offset labour costs around your house (even as a tenant in Germany!) against tax. So if you have a cleaner, gardener or craftsman, you can deduct these from your tax bill. Make sure you keep all receipts, as the tax office may want to have your expenses documented.

You have until 31 July each year to submit your tax return for the previous year.

Things are slightly different for voluntary tax declarations which can be filed within 4 years of time!

For private individuals and companies, tax returns are now often submitted electronically. You can either use the tax authorities' free Elster-Forumlar programme or complete the online tax return under "My Elster".

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