Taxes in General and taxes for employees in Germany briefly explained

Whilst this article isn’t tax advice, it will be a basic guide for expats about taxes in Germany.

If you have any questions you can email me on this form.

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Recent history: Germany, the land of infinite opportunities

After the Second World War, most countries in Europe had at least some cities to rebuild ex novo. Collapsed buildings, punctured walls, severely damaged bridges and roads, hospitals, factories, and this was a great opportunity not only for the Germans but also for foreign workers.

Germany dismantled, demolished and scrapped most of its damaged buildings substituting them with modern ones in line with the current technology, becoming much more productive than other European countries which preferred to repair and not apply new technologies. 

Germany at the same time spent some billions also to repair important historical buildings, rebuilt entire cities, such as Dresden, giving a home to those that fled because of the bombardments and this spiked a huge demand in the labour force.

Suddenly great masses of people, internally and coming from abroad moved to the most important cities in Germany, worn uniforms, picked the hammer, climbed the crane and piece by piece, Germany was back on track again, stronger than ever before.

Germans along with a Turkish minority, Italians, Polish, Serbians, Greeks, Albanians and Romanians, literally ‘’Made Germany Great Again’’, working with work permits. Some of them remained, some of them came back home with sufficient money to start a business in their home countries or gained much more by growing Germany than their own countries. Today Germany is the third country with the most foreign people worldwide, consisting of 10 million people out of 83.

Germany, with its thorough organization and foreign labour aid, became the strongest quality-industrial manufacturer in Europe and today challenges the USA (330M inhabitants) and China (1.4 billion) by exported products, countries which are several times more populous than Germany (just 83 million).

pastedGraphic_1.png

Why migrating to Germany? Higher wages and one of the cheapest cost of living in Europe.

Generally, extremely rich countries like Germany are also equally expensive but this is not the case for this great manufacturer. On the European price index, Germany is closer to Scandinavian countries by average salary and closer to Spain and Greece in comparison to prices than it is to France or Italy.

Emigrating to Germany, also from European countries can be quite convenient given these two scores we previously mentioned. Let us make a brief comparison between Hamburg, considered to be an expensive city in Germany and Milan, the biggest industrial city in Italy, on the website Numbeo.com, similar for population and two of the greatest cities in the respective countries: https://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=Germany&country2=Italy&city1=Munich&city2=Milan&tracking=getDispatchComparison

pastedGraphic_2.png

What we discover is, that Milan is on average about 5%-20% more expensive but the salary gap is enormous. The average salary in Milan is just 1.640€ compared to 2.730€ in Hamburg. If you compare Milan to Berlin, 

pastedGraphic_3.png

The results are even more drastic with a salary gap of 1.640€ to 2500€ and an average difference in cost of living of 25-35%.

Or Paris, one of the most expensive cities in Europe, with an average salary of 2.250€ to 2.500€ but much more expensive than Berlin, from 35-60% more.

pastedGraphic_4.png

Therefore, as an expat living in Germany, your quality of life is decisively much higher than in any other European country, where at a higher salary you can expect a much higher cost of living.

Among those who preferred to leave their country and work in Germany, they know that it is necessary to know German and have some qualities, skills or certificates in order to make a high salary. Germany is extremely meritocratic and you earn on the basis of how good you are.

Low skilled workers who barely speak Germany can expect a 9.35€ (gross) minimum wage that accounts to 1500€ gross monthly salary, what about the net salary? What if your salary is much higher? What are you expected to pay?

Taxes in Germany can be high but are extremely customized

Generally in most countries, there are few options to choose, you just input your salary amount and that’s it, the calculator will show you how much you have to pay in each bracket minus all the receipts that prove how much you have spent and therefore how much you can deduct from your taxes. This, obviously, is similar in Germany, but it customizes it giving you some choice and not making everything compulsory.

What does your net salary depend on in Germany?

Your gross salary will be depending on:

  • Does your employer give you any benefit in monetary terms such as a vehicle? You will pay a tax on it.
  • What fiscal year are you in? Fiscal laws change quite often.
  • Do you have anything to deduct?
  • What is your Steuerklasse (tax class)? This is quite particular and we will cover it later
  • Do you want to pay for the church of Germany? 
  • What is the Land you are currently living in?
  • Do you have any children?
  • How old are you?
  • What type of medical insurance do you want? Subsidized from the government or do you own one or your own?
  • Krankenkassen fee (Medical insurance, generally covered or split between employer and employee, compulsory)
  • Do you want to be covered for your retirement by the State?
  • Do you want to be covered in case you lose your job by the State?

On the basis of the circumstances you are living in, the taxes change quite heavily. Differently from other countries such as Italy where you are obliged to pay for your pension and insurance in case you lose your job, in Germany, you have the freedom to choose and also you can decide if it is more convenient to you to be covered by the State’s medical insurance or you will have to show that you already have a private one. Now we will cover step by step each case.

How is a monetary benefit granted by your employer taxed?

There are two types of monetary benefits to be considered, the discount allowance and the so-called ‘’small discount allowance’’.

The discount allowance case

Example: You have just bought a television through your employer. This device usually costs 1,000 euros in retail, but you have received a 20% discount on it. The amount saved, 200 euros, is considered to be a monetary advantage. This, therefore, has to be taxed. However, there is a discount allowance. It is currently 1,080 euros per year. In this example, this means that the non-cash benefit has no tax effect. 

Frequent flyers can use their bonus miles tax-free as part of the discount allowance. Therefore, if you travel a lot for business by plane, and have permission from your employer, you can fly with the bonus miles received tax-free on vacation. The maximum limit is 1,080 euros per year.

The small discount allowance case

Many companies on a regular basis offer:

  • Fuel vouchers;
  • Monthly passes or grants for local transport;
  • Grants for meals in the company canteen;
  • Grants for contribution to the gym;
  • Newspaper subscriptions.

A small discount allowance means you can give small benefits up to a maximum of EUR 44 per month.

It is important to note that whatever subsidies your boss offers you, they are only tax-free if they do not exceed a total of 44 euros per month. In addition, it must be a non-cash benefit, i.e. a service that cannot be paid out in cash.

Subsidies for childcare

These can be payments with which the employer subsidizes the expenses for a childminder or subsidies for meals and other types of care. These additional payments made by the company are generally tax-free. There is also no upper limit. However, you have to consider these requirements:

  • The child is not yet required to go to school;
  • The employer pays the allowances in addition to the salary.

The tax-free subsidies from the employer reduce your own expenses for childcare costs.

Special payments for rare cases of need can be tax-free. For example, in the event of illness, death or birth. The support money from the employer is tax-free up to an amount of 600 euros.

The day of your birthday or on special occasions your boss can give you a gift up to 60€ tax-free.

Workwear is not considered a monetary benefit and therefore it won’t be taxed, this also applies for all type of clothing.

You drive a privately used company car or electric bike, it is unsure but you may be asked a 1% on the entire value of the care. If it is worth 35.400€ you can expect to add €354.00 to your monthly tax bill or 4.248.00€ yearly. The other expenses will be paid by you, your company or will be split.

The fiscal year 2020 and the current income tax brackets

Germany has a progressive tax that ranges between 14% and 45% arguing if you are a single taxpayer or married.

Single taxpayer income tax:

0% between 0 to 9.408€;

14% between 9.408€ to 57.051€;

42% between 57.051€ to 270.500€;

45% from 270.500€ above.

Married taxpayers income tax:

0% between 0 to 18.816€;

14% between 18.816€ to 114.102€;

42% between 114.102€ to 541.000€;

45% from 541.000€ above.

Surcharges on the fiscal year, income tax 2020 in Germany

To improve the economic situation of certain areas in Germany that have been hit the most by the war or communist past, it was created a tax called solidarity tax, as high as 5.5%, but only for high-income earners (meaning in the 42% bracket). This surcharge is imposed on all individual income taxes and it will be slowly dismantled starting by the year 2021.

Are you a believer? Church tax

Members of officially recognised churches have to pay between 8 to 9% surcharge on their income to the church they are following, this is not compulsory and it deeply depends on the federal state you are a resident of.

Tax deductions 

You can deduct several items from your tax bill granted you have proper documentation and receipts to prove your expenses. If your employer reimburses your expenses, they cannot be deducted from your tax bill.

For employees common tax deductions may include:

  • Costs related to displacement to and from work
  • Business literature
  • Professional dues 
  • Workwear and professional equipment

There is a blanket allowance for employees worth 1000€ of deductions per year. If it exceeds the lump sum of 1000€, they are deductible if they can be substantiated.

Individual deductions

Charity and similar contributions

You can deduct 20% of charitable contributions in Germany and also on international organizations. The church tax is 100% deductible.

Alimony payments

Individual taxpayers are granted deductions up to 14.000€ for the alimony paid to a divorced partner

Social security contributions

You can deduct social security contributions and insurance premiums up to a specific limit:

  • Health insurance are completely tax-deductible as far as primary basic healthcare is considered.
  • Unemployment insurance costs can be deducted up to a maximum of 2800€ per year, 1900€ for pensioners and employees. This applies only if hasn’t been applied earlier for other social security contributions, like health insurance.
  • Pension schemes are tax-deductible up to 25.000€ or 50.000 for married taxpayers. In 2020 the tax deduction amounts to 90% on the contributions and increases by 2% from now each year up until the year 2025. Employees contributions are tax-exempt as they contribute to the state pension scheme, therefore it is included under the income tax act.
  • You can deduct up to 4000€ each year per child younger than 14 years old or handicapped given that you fit certain requirements.
  • You can deduct 30% of your tuition fees (excluding housing, care and food) both in the EU and EEA countries, not only Germany. If the children tax deduction has been already applied, the applicant can ask only 5000€ yearly tax relief per child.
  • Further deductions may be granted to families that have handicapped children.
  • Further deductions can be considered for families having kids or older 18 who are either studying in Germany and can be granted 930€ per year or less in case they are studying abroad, adjusted to the cost of living.
  • Further deductions can be considered for the parents who have children working and earning less than 9.408€ yearly.
  • Companies can deduct interest expenses, personnel expenses, operating material and work equipment.
  • A business can deduct up to 1.000.000€ of losses yearly or 2.000.000€ in case the owner is married. A loss above 1.000.000€ or 2.000.000€ if married can be further deducted with certain limitations.

The Steuerklass or class of taxation

A quite unique way of taxation you won’t see in many countries is this, the Steuerklass. The Steuerklass splits families or individual into 6 classes and, belonging to the first or the 6th, can change substantially the income tax, tax reliefs and deductions you will have to pay. Your tax class in Germany is determined mainly by your marital status.

Steuerklass 1: If you are single, widowed, divorced or long-term separated from your spouse

Steuerklass 2: If you divorced or separated from your spouse and you’re a single parent

Steuerklass 3: You are married to a higher income partner than yours

Steuerklass 4: You are married and both spouses have similar or equal incomes

Steuerklass 5: You are married to a lower-income partner than yours

Steuerklass 6: You more jobs or tax deductions.

If you happen to fall in the Steuerklass 3 or 5 where one of the spouses earns more or less than the other, there can be some savings on the tax bill. 

  • If spouse 1 owes 20.000€ in taxes at the end of the year
  • And spouse 2 owes 3.000€ at the end of the year
  • Joint they will have a tax bill of 23.000€
  • They will have a tax deduction of 50% on the lowest one, hence 1500€ per year.
  • They will pay 21.500€

Land taxation? Forget it

In the United States, each Federal State has its own additional federal tax that has to be added to the income tax. It is not ‘’rare’’ to see Californians that pay more than 10% in federal tax moving to neighbouring Nevada with 0% federal tax probably to ‘’redistribute’’ the population and make it more ‘’homogeneous’’.

In Germany it is different, no federal tax is applied, whatever is the Land you are currently living in. Feel free to live wherever you want without fearing an increased tax bill.

Young entrepreneurs have friendlier taxation

There seem not to be any tax deductions if you are a young entrepreneur differently from other countries, the only thing that matters is if you are married or not.

Medical insurance

You can decide either to have a private health insurance or pay to the State and participate to the universal health care coverage. It is compulsory to decide between these two options, if you are opting for a private one, you will have to prove that you are actually paying for it so as not to pay taxes twice.

The Krankenkasse fee

There are two types of health insurance companies in Germany, public-owned ones who require a fee and private ones. Private ones work like in the US, the public-owned ones will ask you to pay the KV fee. Each land has its own KV fee having each one a public-owned company. It goes from 0.3% to 1.2%. Generally, it is 0.8-0-9%

The Pflegeversicherung, the Unemployment fee

The unemployment fee is a proportional fee, you may pay between 18€ to 83.00€ arguing to your income tax bracket.

Simulation arguing to your status, lower-income and high-income families and or individuals with health insurance and KV subsidized and no tax deductions living in Berlin

  • Simulation on a single individual with no kids, 30 years old and 1.500€ salary

Steuerklass 1. On a 1.500€ gross monthly income, you will be expected to pay 372€, 65.00€ in income tax and 300€ in social security contributions: 140.00€ to your pension fund, 18€ in unemployment insurance, 116.00€ health insurance, 26€ in care insurance. Net income: 1.137,00€

  • Simulation on a single individual with no kids, 30 years old and 10.000€ salary

Steuerklass 1. On a 10.000€ gross monthly income, you will be expected to pay 4.310€, 3.185€ in taxes (including 166€ in solidarity surcharge being a high-income individual) and 1.123€ in Social Security contributions, being: 600€ in pension insurance, 77.00€ in unemployment insurance, 365€ of health insurance and 83.00 of care insurance. Net income: 5.690,00€

  • Simulation on a single individual with 2 kids, 30 years old and 1.500€ salary

Steuerklass 2. On a 1.500€ gross monthly income, you will be expected to pay 32.75€ in taxes and 295.00€ in social contributions, being €140.00 for your pension fund, 18.00€ for employment, 116.00€ health insurance, 22.00€ in care insurance. Net income: 1.170,00€

  • Simulation on a single individual with 2 kids, 30 years old and 10.000€ salary

Steuerklass 2. On a 10.000€ gross monthly income, you will be expected to pay 3.100€ in taxes and 1.110€ in social contributions, being €600.00 for your pension fund, 77.00€ for employment, 365.00€ health insurance, 71.00€ in care insurance, solidarity surcharge of 132.00€ being high-income. Net income: 5.800,00€

  • Simulation on a married individual with 2 kids, 30 years old and 1.500€ salary, both parents

Steuerklass 4. On a 1.500€ gross monthly income, you will be expected to pay 65.00€ in taxes and 296.00€ in social contributions, being €140.00 for your pension fund, 18.00€ for employment, 116.00€ health insurance, 23.00€ in care insurance. Net income: 1.138,00€ but you have tax deductions and you can half it.

  • Simulation on a married individual with 2 kids, 30 years old and 10.000€ salary, both parents

Steuerklass 4. On a 10.000€ gross monthly income, you will be expected to pay 3.175€ in taxes and 1.112€ in social contributions, being €600.00 for your pension fund, 77.00€ for employment, 365.00€ health insurance, 71.00€ in care insurance, solidarity surcharge of 151.00€ being high-income. Net income: 5.715€, but you have tax deductions and you can half it.

Overall, the taxation seems quite family-friendly and you can expect to decrease your tax bill with the before mentioned tax reliefs and tax deductions we previously mentioned, enjoying way more of your salary, and remember, in a rich country with a relatively low cost of living!

pastedGraphic.png

Recent history: Germany, the land of infinite opportunities

After the Second World War, most countries in Europe had at least some cities to rebuild ex novo. Collapsed buildings, punctured walls, severely damaged bridges and roads, hospitals, factories, and this was a great opportunity not only for the Germans but also for foreign workers.

Germany dismantled, demolished and scrapped most of its damaged buildings substituting them with modern ones in line with the current technology, becoming much more productive than other European countries which preferred to repair and not apply new technologies. 

Germany at the same time spent some billions also to repair important historical buildings, rebuilt entire cities, such as Dresden, giving a home to those that fled because of the bombardments and this spiked a huge demand in the labour force.

Suddenly great masses of people, internally and coming from abroad moved to the most important cities in Germany, worn uniforms, picked the hammer, climbed the crane and piece by piece, Germany was back on track again, stronger than ever before.

Germans along with a Turkish minority, Italians, Polish, Serbians, Greeks, Albanians and Romanians, literally ‘’Made Germany Great Again’’, working with work permits. Some of them remained, some of them came back home with sufficient money to start a business in their home countries or gained much more by growing Germany than their own countries. Today Germany is the third country with the most foreign people worldwide, consisting of 10 million people out of 83.

Germany, with its thorough organization and foreign labour aid, became the strongest quality-industrial manufacturer in Europe and today challenges the USA (330M inhabitants) and China (1.4 billion) by exported products, countries which are several times more populous than Germany (just 83 million).

pastedGraphic_1.png

Why migrating to Germany? Higher wages and one of the cheapest cost of living in Europe.

Generally, extremely rich countries like Germany are also equally expensive but this is not the case for this great manufacturer. On the European price index, Germany is closer to Scandinavian countries by average salary and closer to Spain and Greece in comparison to prices than it is to France or Italy.

Emigrating to Germany, also from European countries can be quite convenient given these two scores we previously mentioned. Let us make a brief comparison between Hamburg, considered to be an expensive city in Germany and Milan, the biggest industrial city in Italy, on the website Numbeo.com, similar for population and two of the greatest cities in the respective countries: https://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=Germany&country2=Italy&city1=Munich&city2=Milan&tracking=getDispatchComparison

pastedGraphic_2.png

What we discover is, that Milan is on average about 5%-20% more expensive but the salary gap is enormous. The average salary in Milan is just 1.640€ compared to 2.730€ in Hamburg. If you compare Milan to Berlin, 

pastedGraphic_3.png

The results are even more drastic with a salary gap of 1.640€ to 2500€ and an average difference in cost of living of 25-35%.

Or Paris, one of the most expensive cities in Europe, with an average salary of 2.250€ to 2.500€ but much more expensive than Berlin, from 35-60% more.

pastedGraphic_4.png

Therefore, as an expat living in Germany, your quality of life is decisively much higher than in any other European country, where at a higher salary you can expect a much higher cost of living.

Among those who preferred to leave their country and work in Germany, they know that it is necessary to know German and have some qualities, skills or certificates in order to make a high salary. Germany is extremely meritocratic and you earn on the basis of how good you are.

Low skilled workers who barely speak Germany can expect a 9.35€ (gross) minimum wage that accounts to 1500€ gross monthly salary, what about the net salary? What if your salary is much higher? What are you expected to pay?

Taxes in Germany can be high but are extremely customized

Generally in most countries, there are few options to choose, you just input your salary amount and that’s it, the calculator will show you how much you have to pay in each bracket minus all the receipts that prove how much you have spent and therefore how much you can deduct from your taxes. This, obviously, is similar in Germany, but it customizes it giving you some choice and not making everything compulsory.

What does your net salary depend on in Germany?

Your gross salary will be depending on:

  • Does your employer give you any benefit in monetary terms such as a vehicle? You will pay a tax on it.
  • What fiscal year are you in? Fiscal laws change quite often.
  • Do you have anything to deduct?
  • What is your Steuerklasse (tax class)? This is quite particular and we will cover it later
  • Do you want to pay for the church of Germany? 
  • What is the Land you are currently living in?
  • Do you have any children?
  • How old are you?
  • What type of medical insurance do you want? Subsidized from the government or do you own one or your own?
  • Krankenkassen fee (Medical insurance, generally covered or split between employer and employee, compulsory)
  • Do you want to be covered for your retirement by the State?
  • Do you want to be covered in case you lose your job by the State?

On the basis of the circumstances you are living in, the taxes change quite heavily. Differently from other countries such as Italy where you are obliged to pay for your pension and insurance in case you lose your job, in Germany, you have the freedom to choose and also you can decide if it is more convenient to you to be covered by the State’s medical insurance or you will have to show that you already have a private one. Now we will cover step by step each case.

How is a monetary benefit granted by your employer taxed?

There are two types of monetary benefits to be considered, the discount allowance and the so-called ‘’small discount allowance’’.

The discount allowance case

Example: You have just bought a television through your employer. This device usually costs 1,000 euros in retail, but you have received a 20% discount on it. The amount saved, 200 euros, is considered to be a monetary advantage. This, therefore, has to be taxed. However, there is a discount allowance. It is currently 1,080 euros per year. In this example, this means that the non-cash benefit has no tax effect. 

Frequent flyers can use their bonus miles tax-free as part of the discount allowance. Therefore, if you travel a lot for business by plane, and have permission from your employer, you can fly with the bonus miles received tax-free on vacation. The maximum limit is 1,080 euros per year.

The small discount allowance case

Many companies on a regular basis offer:

  • Fuel vouchers;
  • Monthly passes or grants for local transport;
  • Grants for meals in the company canteen;
  • Grants for contribution to the gym;
  • Newspaper subscriptions.

A small discount allowance means you can give small benefits up to a maximum of EUR 44 per month.

It is important to note that whatever subsidies your boss offers you, they are only tax-free if they do not exceed a total of 44 euros per month. In addition, it must be a non-cash benefit, i.e. a service that cannot be paid out in cash.

Subsidies for childcare

These can be payments with which the employer subsidizes the expenses for a childminder or subsidies for meals and other types of care. These additional payments made by the company are generally tax-free. There is also no upper limit. However, you have to consider these requirements:

  • The child is not yet required to go to school;
  • The employer pays the allowances in addition to the salary.

The tax-free subsidies from the employer reduce your own expenses for childcare costs.

Special payments for rare cases of need can be tax-free. For example, in the event of illness, death or birth. The support money from the employer is tax-free up to an amount of 600 euros.

The day of your birthday or on special occasions your boss can give you a gift up to 60€ tax-free.

Workwear is not considered a monetary benefit and therefore it won’t be taxed, this also applies for all type of clothing.

You drive a privately used company car or electric bike, it is unsure but you may be asked a 1% on the entire value of the care. If it is worth 35.400€ you can expect to add €354.00 to your monthly tax bill or 4.248.00€ yearly. The other expenses will be paid by you, your company or will be split.

The fiscal year 2020 and the current income tax brackets

Germany has a progressive tax that ranges between 14% and 45% arguing if you are a single taxpayer or married.

Single taxpayer income tax:

0% between 0 to 9.408€;

14% between 9.408€ to 57.051€;

42% between 57.051€ to 270.500€;

45% from 270.500€ above.

Married taxpayers income tax:

0% between 0 to 18.816€;

14% between 18.816€ to 114.102€;

42% between 114.102€ to 541.000€;

45% from 541.000€ above.

Surcharges on the fiscal year, income tax 2020 in Germany

To improve the economic situation of certain areas in Germany that have been hit the most by the war or communist past, it was created a tax called solidarity tax, as high as 5.5%, but only for high-income earners (meaning in the 42% bracket). This surcharge is imposed on all individual income taxes and it will be slowly dismantled starting by the year 2021.

Are you a believer? Church tax

Members of officially recognised churches have to pay between 8 to 9% surcharge on their income to the church they are following, this is not compulsory and it deeply depends on the federal state you are a resident of.

Tax deductions 

You can deduct several items from your tax bill granted you have proper documentation and receipts to prove your expenses. If your employer reimburses your expenses, they cannot be deducted from your tax bill.

For employees common tax deductions may include:

  • Costs related to displacement to and from work
  • Business literature
  • Professional dues 
  • Workwear and professional equipment

There is a blanket allowance for employees worth 1000€ of deductions per year. If it exceeds the lump sum of 1000€, they are deductible if they can be substantiated.

Individual deductions

Charity and similar contributions

You can deduct 20% of charitable contributions in Germany and also on international organizations. The church tax is 100% deductible.

Alimony payments

Individual taxpayers are granted deductions up to 14.000€ for the alimony paid to a divorced partner

Social security contributions

You can deduct social security contributions and insurance premiums up to a specific limit:

  • Health insurance are completely tax-deductible as far as primary basic healthcare is considered.
  • Unemployment insurance costs can be deducted up to a maximum of 2800€ per year, 1900€ for pensioners and employees. This applies only if hasn’t been applied earlier for other social security contributions, like health insurance.
  • Pension schemes are tax-deductible up to 25.000€ or 50.000 for married taxpayers. In 2020 the tax deduction amounts to 90% on the contributions and increases by 2% from now each year up until the year 2025. Employees contributions are tax-exempt as they contribute to the state pension scheme, therefore it is included under the income tax act.
  • You can deduct up to 4000€ each year per child younger than 14 years old or handicapped given that you fit certain requirements.
  • You can deduct 30% of your tuition fees (excluding housing, care and food) both in the EU and EEA countries, not only Germany. If the children tax deduction has been already applied, the applicant can ask only 5000€ yearly tax relief per child.
  • Further deductions may be granted to families that have handicapped children.
  • Further deductions can be considered for families having kids or older 18 who are either studying in Germany and can be granted 930€ per year or less in case they are studying abroad, adjusted to the cost of living.
  • Further deductions can be considered for the parents who have children working and earning less than 9.408€ yearly.
  • Companies can deduct interest expenses, personnel expenses, operating material and work equipment.
  • A business can deduct up to 1.000.000€ of losses yearly or 2.000.000€ in case the owner is married. A loss above 1.000.000€ or 2.000.000€ if married can be further deducted with certain limitations.

The Steuerklass or class of taxation

A quite unique way of taxation you won’t see in many countries is this, the Steuerklass. The Steuerklass splits families or individual into 6 classes and, belonging to the first or the 6th, can change substantially the income tax, tax reliefs and deductions you will have to pay. Your tax class in Germany is determined mainly by your marital status.

Steuerklass 1: If you are single, widowed, divorced or long-term separated from your spouse

Steuerklass 2: If you divorced or separated from your spouse and you’re a single parent

Steuerklass 3: You are married to a higher income partner than yours

Steuerklass 4: You are married and both spouses have similar or equal incomes

Steuerklass 5: You are married to a lower-income partner than yours

Steuerklass 6: You more jobs or tax deductions.

If you happen to fall in the Steuerklass 3 or 5 where one of the spouses earns more or less than the other, there can be some savings on the tax bill. 

  • If spouse 1 owes 20.000€ in taxes at the end of the year
  • And spouse 2 owes 3.000€ at the end of the year
  • Joint they will have a tax bill of 23.000€
  • They will have a tax deduction of 50% on the lowest one, hence 1500€ per year.
  • They will pay 21.500€

Land taxation? Forget it

In the United States, each Federal State has its own additional federal tax that has to be added to the income tax. It is not ‘’rare’’ to see Californians that pay more than 10% in federal tax moving to neighbouring Nevada with 0% federal tax probably to ‘’redistribute’’ the population and make it more ‘’homogeneous’’.

In Germany it is different, no federal tax is applied, whatever is the Land you are currently living in. Feel free to live wherever you want without fearing an increased tax bill.

Young entrepreneurs have friendlier taxation

There seem not to be any tax deductions if you are a young entrepreneur differently from other countries, the only thing that matters is if you are married or not.

Medical insurance

You can decide either to have a private health insurance or pay to the State and participate to the universal health care coverage. It is compulsory to decide between these two options, if you are opting for a private one, you will have to prove that you are actually paying for it so as not to pay taxes twice.

The Krankenkasse fee

There are two types of health insurance companies in Germany, public-owned ones who require a fee and private ones. Private ones work like in the US, the public-owned ones will ask you to pay the KV fee. Each land has its own KV fee having each one a public-owned company. It goes from 0.3% to 1.2%. Generally, it is 0.8-0-9%

The Pflegeversicherung, the Unemployment fee

The unemployment fee is a proportional fee, you may pay between 18€ to 83.00€ arguing to your income tax bracket.

Simulation arguing to your status, lower-income and high-income families and or individuals with health insurance and KV subsidized and no tax deductions living in Berlin

  • Simulation on a single individual with no kids, 30 years old and 1.500€ salary

Steuerklass 1. On a 1.500€ gross monthly income, you will be expected to pay 372€, 65.00€ in income tax and 300€ in social security contributions: 140.00€ to your pension fund, 18€ in unemployment insurance, 116.00€ health insurance, 26€ in care insurance. Net income: 1.137,00€

  • Simulation on a single individual with no kids, 30 years old and 10.000€ salary

Steuerklass 1. On a 10.000€ gross monthly income, you will be expected to pay 4.310€, 3.185€ in taxes (including 166€ in solidarity surcharge being a high-income individual) and 1.123€ in Social Security contributions, being: 600€ in pension insurance, 77.00€ in unemployment insurance, 365€ of health insurance and 83.00 of care insurance. Net income: 5.690,00€

  • Simulation on a single individual with 2 kids, 30 years old and 1.500€ salary

Steuerklass 2. On a 1.500€ gross monthly income, you will be expected to pay 32.75€ in taxes and 295.00€ in social contributions, being €140.00 for your pension fund, 18.00€ for employment, 116.00€ health insurance, 22.00€ in care insurance. Net income: 1.170,00€

  • Simulation on a single individual with 2 kids, 30 years old and 10.000€ salary

Steuerklass 2. On a 10.000€ gross monthly income, you will be expected to pay 3.100€ in taxes and 1.110€ in social contributions, being €600.00 for your pension fund, 77.00€ for employment, 365.00€ health insurance, 71.00€ in care insurance, solidarity surcharge of 132.00€ being high-income. Net income: 5.800,00€

  • Simulation on a married individual with 2 kids, 30 years old and 1.500€ salary, both parents

Steuerklass 4. On a 1.500€ gross monthly income, you will be expected to pay 65.00€ in taxes and 296.00€ in social contributions, being €140.00 for your pension fund, 18.00€ for employment, 116.00€ health insurance, 23.00€ in care insurance. Net income: 1.138,00€ but you have tax deductions and you can half it.

  • Simulation on a married individual with 2 kids, 30 years old and 10.000€ salary, both parents

Steuerklass 4. On a 10.000€ gross monthly income, you will be expected to pay 3.175€ in taxes and 1.112€ in social contributions, being €600.00 for your pension fund, 77.00€ for employment, 365.00€ health insurance, 71.00€ in care insurance, solidarity surcharge of 151.00€ being high-income. Net income: 5.715€, but you have tax deductions and you can half it.

Overall, the taxation seems quite family-friendly and you can expect to decrease your tax bill with the before mentioned tax reliefs and tax deductions we previously mentioned, enjoying way more of your salary, and remember, in a rich country with a relatively low cost of living!

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Adam Fayed financial consultant WhatsApp