Annual income tax return and assessment

The German tax year is the calendar year. After the end of the tax year a German income tax return must be filed with the local tax authorities. The normal deadline is 31 May, which is automatically extended to 31 December if the tax return is prepared by a tax professional. After filing, the tax return is reviewed by the tax authorities. This might take 3 to 6 months. Once the review is finalised, an assessment notice is sent out.

Filing obligations

In general, taxpayers who receive employment income only which has been subject to German wage tax withholding are not obliged to file a German income tax return, but they can do this on a voluntary basis to claim for a refund.

However, depending on the kind and amount of income, a filing obligation exists for certain taxpayers. For instance, the following taxpayers are obliged by German tax law to file annual income tax returns:

• Freelancers and self-employed businesses;
• Taxpayers with outside income received in the year of relocation to/from Germany;
• Married couples (both employees) that opted for tax classes 3 and 5 in their wage tax; cards;
• Employees that filed a wage tax relief application.

Tax rates 2011

German income tax has progressive tax rates that start at 14.0 percent which increase in increments up to 42.0 percent. This marginal tax rate of 42.0 percent applies for taxable income above EUR 52,882 (married tax table: EUR 105,763).

For taxable income above EUR 250,731 (married tax table: EUR 501,462), the income tax amounts to 45.0 percent.
An amount of EUR 8,004 Euro (married tax table: EUR 16,007) per year remains tax free, meaning that only the exceeding amount will be subject to the income tax rates shown above.

In addition to the income tax, solidarity tax in the amount of 5.5 percent on income tax is due.

Furthermore, if one is member of a church registered in Germany, church tax of 8 or 9 percent (depending on the federal state one is living in) on income tax is paid.

Married couples can apply for filing a joint tax return and might benefit from the married tax table.

Taxable income

In general, all income except interests, dividends and capital gains on stocks is taxed at the above mentioned tax rates.

Interests, dividends and capital gains on stocks are subject to a flat tax of 25 percent plus 5.5 percent thereon, giving a total tax liability of 26.37 percent.

Some types of income are tax exempt but used to determine the tax rate, like unemployment benefits, maternity leave payments and certain income that has been taxed in another country due to a double tax treaty.

Deductions

In general, the majority of deductions can be divided into

• business expenses (Werbungskosten);
• special expenses (Sonderausgaben);
• extraordinary expenses (aussergewöhnliche Belastungen).

Whereas business expenses are expenses that are directly connected to taxable income, special expenses are payments that the German tax law want to support by giving a tax deduction possibility.

Extraordinary expenses are expenses that the majority of taxpayers don’t have.

Typical business expenses for employment income are:

• Commuting expenses from home to workplace;
• Double household expenses;
• Relocation expenses;
• Travelling expenses;
• Training and professional literature expenses;
• Expenses for professional equipment;

If the sum of business expenses doesn’t exceed an amount of EUR 1,000, the lump sum of EUR 1,000 is deducted automatically.

The following special expenses are deductible (examples only, maximum deduction might be limited):

• Church tax
• Donations to German organisations or German political parties
• Payments to divorced spouse
• School fees
• Pension insurance contributions
• Health, care, liability and accident insurance contributions

If the sum of special expenses doesn’t exceed an amount of EUR 36 (married tax table: 72 Euro), the lump sum of EUR 36 (EUR 72) is deducted automatically.

Extraordinary expenses that are deductible when calculating the taxable income could be:

• Medical expenses
• Support of relatives
• Lump sums for disabled taxpayers

Child relief

Taxpayers with dependent children or children in education receive a monthly child payment (Kindergeld) that amounts to EUR 184 per child per month for the first two children, EUR 190 for the third, EUR 215 for the fourth and following in 2012 (2010: same amounts).

When filing a German tax return, it is reviewed to see if a deduction of a child allowance is more beneficial than the child payments. If so, the child allowance is deducted from the taxable income and the child payments are added to the final tax liability.

Tax professionals

As the German tax law is very complex, most taxpayers seek professional help when filing annual income tax returns.

The only professions that are permitted to assist with income tax return filing according to German law are:

• Tax advisors (Steuerberater, Steuerbevollmächtigte)
• Lawyers (Rechtsanwälte)
• Public accountants (Wirtschaftsprüfer, vereidigte Buchprüfer)
• Wage tax help associations (Lohnsteuerhilfevereine)

It is a wide spread prejudice that the fee of a tax professionals is determined by the amount of refund. In fact, this is forbidden by German law.

Actually, the fees for tax return preparations of all above-mentioned professions are limited by certain professional tables and depend on the amount of income and complexity of the tax return preparation.

Updated in March  2012 by tax advisor Martin Brune.

Martin Brune is listed on Expatica's A-Z listings and is available as a tax advisor on our Ask the Expert section under the Tax category.