NB: This is just an experience. Please always follow official websites. Thanks.
Income tax and social security
The German system of income tax is known for endless exceptions and potential deductions. This is not all bad news at all, as this is really where your tax refund is. You need to make sure that you do make a claim for all those things that are allowable and reduce your taxable income as much as possible. High nominal tax rates dont hurt as much if the amount of taxable income is low. You can find the most frequently asked tax questions by expats living and working in Germany at expattax.de . If you don’t find the answer to your specific question in this FAQ section, please get in touch and request an individual answer. Prompt response guaranteed!
Germany is certainly not a low-tax jurisdiction. But it is also not as bad as a lot of people think. Everybody seems to be talking about the tax rate being in the area of 50% or so. But how can it then be, that the actual tax bill for a single individual with an annual salary of 50k is only around 12k (24%) and for a married couple with a joint annual income of 80k it is only around 16k (20%)? These are figures for 2015 income tax, including surcharge – Solidaritätszuschlag.
The answer in many cases is social security (Sozialversicherung)!
Social security is not classed as tax, but rather as “public insurance” which you pay into this insurance system and you get something directly in return. Not like taxes where your money is gone and you will never see anything directly returned to you. So, what is it then that you get in return?
- health insurance
- old age care
- unemployment benefits
What are the contributions:
- Health insurance: 7.5 % out of your salary (capped at 54,900 pa)
- Old age care: 1.175 % out of your salary (capped at 54,900 pa)
- Unemployment benefits: 1.5 % out of your salary (capped at 72,600 pa)
- Pension: 9.35 % out of your salary (capped at 72,600 pa)
Adding all these elements up, you can see that this gets expensive. The good news is, that you will have a pretty comprehensive medical cover (by international standards) to pay for all trips to hospitals, doctors and basic dental care as well as prescribed drugs from the pharmacy. Depending on various factors you will also get quite significant unemployment benefits (two thirds of your last net wages in many cases with a cap) for a certain period after you have lost your job.
The state pension system is the element in social security which requires the biggest junk of contributions and will unfortunately not really give you a very attractive return at retirement age. Having said that, quite a number of expats are actually in a position to get their German pension contributions refunded after leaving the European Union (main requirement is, that they have made less than 60 months of contributions to the German pension system and have left the EU for at least 24 months).
The German system of income tax applies to employees and self employed individuals alike. Same amounts, rates, thresholds. However, there is a significant difference when it comes to social security. Social security contributions as described above is only mandatory for employees. Self employed individuals only have to have health insurance. They are free to decide how they arrange their pension and how they cover potential periods of unemployment.
Tax Deductible Expenses in Germany
This brief guide is designed to give you a general idea of what you can claim as expenses in Germany against your taxes. As this cannot be a comprehensive list, please feel free to ask if you are not entirely sure whether you can make a claim for an expense or not.
This guide covers the area of expenses in relation to your income. Outside of income related expenses there is also the possibility to claim for certain private expenses such as certain insurance contributions, donations, student loans or medical expenses (just to name some of the most common). For further details, please get in touch with us.
Income Related Expenses – The Concept
You can claim an expense against your income if you can show that it is exclusively related to your income.
If an expense is partly related to your income and partly to your private life, you can make a claim as long as the private element can be clearly quantified and separated.
An expense is related to your income if it allows you to:
– open a source of income- maintain a source of income- increase your income
Most Common Examples (not comprehensive):
Relocation – Anything in relation to your move to Germany (i.e. travel, transport of personal belongings, agent fees to find rental property.)
Home Office – A separate room in your home can be claimed if it is used exclusively for work, provided it is the centre of your work and you have no other work place provided for you. You can claim rent, electricity and all other ongoing expenses. Work related furniture and (IT) equipment can be claimed even if you don’t have a dedicated home office according to the definition above.
Travel to work – Your daily travel to work can be claimed as a work related expense, with 0,3 Euro / kilometer of one way distance between home and work.
Training – If you pay for training in relation to your work (or future work) and do not get reimbursed for by your employer, you can claim this against your income.
Books, Magazines – Publications in relation to your work are tax deductible.
Professional Memberships – Membership fees are deductible.
Customer Entertainment – Invitations for lunch or dinner of customers, potential customers and anybody who can be useful for you with regard to your current or future work are deductible. Provided you can show the restaurant receipt completed with details of who attended (incl. your own name) and the reason for the invitation, you can claim 70% of the bill.
Telephone, mobile, internet – Expenses to the degree that they are work related can be claimed. In most cases, a reasonable estimation is sufficient.
Car – You can claim expenses for your car to the degree that it is used for work related purposes. Unless you can show 100% work use through a detailed log book, there will always be the assumption that you use the car privately as well (benefit in kind).
Legal and Tax advice – If these expenses are related to your income situation, you can make a claim.
Computer – If you can show that you need your computer (and any other IT equipment) predominantly for work, you can make a claim.
Per Diem – Unless your employer already pays you a certain amount for every day you worked away from your regular work place, you can make such a claim in your tax return.
Double Household – If you move to a new place for work purposes and your family (partner and / or children) stay behind, you can claim the expenses for your travel between work and the family home, as well as the expenses for your accommodation near your work.
Taxi – For all work related trips deductible.
Job Search – Any expenses in the course of your job search are deductible (stationary, stamps, phone calls, travel, accommodation etc. )
Union Membership – Contributions are deductible.
Student Loan – Depending on how the loan is linked to your education and your work situation, your interest payments can be deductilble.
MBA course – Is deductible in most cases. You need to show the link to your job following the course.
Banking fees – a small standard allowance is given if your income is paid into your bank account.
As an employee it is a bit harder to make the claim for expenses compared to the claim as a self employed individual. An employee is usually confronted with the question from the tax office: “If your claim is related to your work – how come your employer did not reimburse you for this expense.” In most cases, the solution is to get a letter from your employer to state, that expenses were indeed not reimbursed.
Standard Deduction – Employees get a standard deduction of 1,000 p.a. even if they do not submit any claim. As every employee is entitled to this, it is already taken care of through your monthly wages and does not give you an EXTRA refund at the end of the year. So if you have expenses for the whole year of less than 1,000 dont expect a tax refund.
Insurance – If you need to pay for insurance cover in relation to your work, you can claim it. In most cases, this is relevant for professional indemnity insurance.
Clothes – Clothes can be claimed as long as they are pure work clothes which cannot be worn privately. I.e. safety clothes worn on building sites, laboratories or factories. Plain suits, ties or shirts which CAN be worn on any private occasion are not deductible (irrespective of whether they actually ARE worn privately).
A Piano, a dog, a surfboard, a telescope, a videocamera – All these expenses can be deductible against your taxes if you can explain why they are exclusively related to your work. There are only very, very few claims defined as such. In all other cases it depends on how plausible you can make the link between the expense and your work situation.
Child Benefits / Allowances in the German Tax System
The following is a brief overview of the main child benefits and allowances available in the German tax system:
1. Monthly Payments – Kindergeld
Kindergeld is certainly the main benefit available for families with children. It is paid directly into your bank account on a monthly basis. Currently the monthly payments are 188 Ã¢â€šÂ¬ for your first and your second child, 194 Ã¢â€šÂ¬ for your third child and 219 Ã¢â€šÂ¬ for every child thereafter.Children qualify up to the age of 25 as long as they are in education and do not have their own income.It is important to note that even children living outside of Germany can qualify for Kindergeld. It can happen that you already receive similar child benefits from a foreign state where your child is living. Should this benefit be smaller than the entitlement under German law, it may be possible that the German state will pay you the difference.In order to receive Kindergeld payments you need to actively apply for it (you will not be prompted). Your application (Antrag auf Kindergeld) needs to be submitted to your local Familienkasse which is typically a part of your local Agentur fÃƒÂ¼r Arbeit office (www.arbeitsagentur.de). It is never to late to apply for this benefit. If you were not aware of this option, you can apply retrospectively and get the benefit from day one.
2. Child Care Expenses
a. GeneralChild care expenses can be claimed as a tax deduction for children up to the age of 14. You can claim 2/3 of your expenses, capped at 4,000 Ã¢â€šÂ¬ per child per year. Please note that this covers typical day care expenses like creches, kindergardens, babysitters, nannies, etc.It does explicitly not cover tuition (see also below for private schooling) or course fees such as music or sport education.This benefit is claimed through your annual tax return and requires a receipt to evidence your payment (cash payments are excluded).
b. Nannies, Babysitters, etc.Provided you employ somebody (part time or full time regular employment contract, subject to social security contributions) to mind your children in your home, you can get a tax credit of 20% of the labour cost capped at 4,000 Ã¢â€šÂ¬ per year / per child against your total annual tax bill.This benefit is claimed through your annual tax return.
3. Private Schooling
If you send your children to a private (fee paying) school instead of a free state school, you can claim 30% of the tuition fees capped at 5,000 Ã¢â€šÂ¬ per annum, per child as a tax deduction. As of grade 10 a successful claim can depend on the school and the chosen course program.The deduction covers tuition only. It does not cover the cost for accommodation, food, transport or after hour activities. College fees are unfortunately not covered either.Under German law, children must attend school as of the age of 6. Should you send your child to a private school at a younger age (as provided by many international schools), this is seen as your personal choice and you will unfortunately not qualify for this deduction as long as your child is under 6 years of age.According to rather recent court decisions, you can also qualify for this deduction if your child attends a private school in some other EU-member state.This benefit is claimed through your annual tax return.
4. College Education Extra Cost for Accomodation
While your children’s college fees as such are not deductible against your income, you will be able to claim an annual amount of 924 Ã¢â€šÂ¬ per child per annum as a tax deduction, if they live away from home due to their college education.This benefit is claimed through your annual tax return.
Parents who reduce or give up their work during the first 12-14 months of their child being born in order to care for it, can claim 67% of their lost net income as a payment from the state. The amount is capped at 1,800 Ã¢â€šÂ¬ per month and is based on the average monthly income during the 12 month period before the baby is born.Elterngeld is paid for up to 12 months and can be extended for another 2 months, if the other parent reduces or gives up work for an additional 2 months.The minimum monthly payment for any parent couple (even without income loss) is 300 Ã¢â€šÂ¬ for a 12 month period.
If you are a Non-EU citizen, it may be required that you have been living and working in Germany for at least 3 years prior to the baby being born and that your work permit status allows you to stay.You need to actively apply for Elterngeld. There are regional differences where to send your application (www.elterngeld.de for more details) .Outside of the main benefits as described above, you may also qualify for various minor claims and deductions where children play a role (i.e. increased relocation allowance for families with children, etc.).
Please note that the above material is designed to give you a brief overview of the main aspects of what is available. It cannot replace a detailed analysis of your situation by a professional advisor. Feel free to get in touch for an individual session.
Kirchensteuer – Church tax
If you belong to one of the main religions and you put this down when you register as resident at your arrival in Germany you will have to pay church tax. Take 8% of your income tax due in a year, and it is ON TOP. Only consolation is that you can deduct it from your gross income in your income tax statement (Einkommensteuer). You can formally deregister from your religious organisation and this will also terminate your church tax exposure. See: kirchenaustritt.de
As well as taxes, don’t forget that there are various compulsory insurances to be paid. See: German insurances
Keep in mind that this is a general overview. You will find more specific answers on the most frequently asked tax questions by expats at expattax.de.You will also find a whole list of useful tax related links there.
- Munich Tax office
- Tax consultants
- Freelancing in Germany
- Double Taxation for US citizens who are in Germany
- Elster: income tax return, electronically or on paper forms, with step-by-step instructions
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