Income tax

The subject of income tax is the income of natural persons. Income tax is generally levied on certain income through tax deductions (e.g. wage tax and capital gains tax).

Income tax is levied on income

1. from agriculture and forestry
2. from trade and business,
3. from self-employed work,
4. from employment,
5. from capital assets,
6. from renting and leasing, and
7. the other income mentioned in § 22 EStG (e.g. income from a pension from the statutory pension insurance or from a private funded pension insurance or income from private sales transactions).

Income is profit in the case of agriculture and forestry, business operations and self-employment. The profit is to be determined by comparison of business assets or as the surplus of business income over business expenses or, in the case of smaller agricultural enterprises, according to average rates. In the case of the other types of income, all expenses which are intended to acquire, secure and maintain the income (income-related expenses) are to be deducted from the income from the respective type of income in order to determine the income. Expenses for living (e.g. expenses for food, clothing or housing) may not be deducted as business expenses or income-related expenses.

In order to determine the sum of income, positive and negative income may in principle be offset within one type of income and, in addition, between the individual types of income without restriction.

The following amounts are deducted from this sum of income if the legal requirements are met:

• Old-age relief amount according to § 24a EStG for tax citizens over 64 years of age
• Relief amount for single parents according to § 24b EStG
• Tax-free allowance for farmers and foresters according to § 13 para. 3 EStG

After deducting these amounts, the so-called total amount of income remains.

To determine the income, the following amounts are to be taken into account as a reduction under certain conditions:

• Loss deduction according to § 10d EStG (loss carry forward, loss carry back)
• Special expenses according to §§ 10, 10a, 10b, 10c EStG (e.g. pension expenses, church tax, childcare costs, expenses for own vocational training, school fees, maintenance payments to the divorced or permanently separated spouse/life partner, donations)
• Extraordinary burdens according to §§ 33, 33a, 33b EStG (e.g. medical expenses, maintenance expenses and expenses for vocational training, lump sums for disabled persons, surviving dependants and caregivers)

The maximum amounts deductible as special expenses for old-age provision expenses (e.g. statutory pension insurance contributions, contributions to one's own old-age provision) are as follows

• in 2019, a maximum of EUR 21,388,
• 2020 a maximum of EUR 22,541,
• 2021 a maximum of EUR 23,724,
• 2022 a maximum of EUR 24,100,
• 2023 a maximum of EUR 26,528 and
• 2024 a maximum of EUR 27,566.

In the case of jointly assessed spouses/life partners, the maximum amount is doubled. In the case of employees, this amount is to be reduced by the tax-free employer's contribution to the statutory pension insurance.

The contributions to private and statutory basic health and long-term care insurance and the contributions to the remaining other provident insurance (e.g. liability insurance, unemployment insurance, contribution shares for "comfort benefits" in health insurance) are taken into account as special expenses up to the following maximum annual amounts:

• for entrepreneurs or self-employed persons: up to EUR 2,800
• for employees and civil servants: up to EUR 1,900

The basic contributions to health and long-term care insurance are fully deductible even if the maximum amounts are exceeded. In this case, however, the deduction of the remaining other provident insurances does not apply.

If you do not provide evidence of higher special expenses, a lump sum of EUR 36,00 for single persons and EUR 72,00 for married persons or life partners will be deducted for these (special expenses lump sum).

As a final step in determining the taxable income, the tax-free allowances for children according to §§ 31, 32 EStG must be deducted from the income, if applicable. In 2022, the child allowance amounts to EUR 5,620 and the allowance for care and education or training needs to EUR 2,928. Within the framework of the family benefit equalisation scheme, it is checked whether the child benefit including the child bonus or the tax-free allowances for children have a more favourable effect on your income tax assessment. If the deduction of the tax-free allowances for children is more favourable from a tax point of view, these will be deducted from your income and the child benefit including child bonus already received will be offset.

In the case of a parent couple with unlimited income tax liability who do not live together, the person in whose care the child is receives the child benefit as a matter of priority. The parent who receives the child benefit also receives the child bonus. In principle, each parent receives half of the child allowance and, if applicable, the allowance for the need for care and education or training. Half of the child benefit and half of the child bonus are then offset against each other. A transfer of the tax-free allowance for children to one parent is possible under certain conditions.

The taxable income determined in this way forms the assessment basis for the standard income tax. The standard income tax, reduced by the domestic and, if applicable, foreign taxes to be credited and possibly further tax reductions (e.g. for expenses for household-related employment/services), increased by certain amounts, is the income tax to be assessed.

The advance income tax payments made for this year and the wage tax and, if applicable, capital gains tax are credited against the income tax assessed. If the settlement results in a surplus to your disadvantage, you must pay this amount as a final payment. If there is a surplus in your favour, this amount will be refunded to you.

The income tax to be paid by you depends on the income tax rate.

It is structured as follows in 2023:

• Tax exemption up to the basic tax-free allowance of EUR 10,908 for single persons / EUR 21,816 for married couples or civil partners
• Tax rate of 14% from a taxable income of EUR 10,909 / EUR 21,818 (initial tax rate)
• Tax rate of up to 45% from a taxable income of EUR 277,826 / EUR 555,652 (top tax rate)

In the case of extraordinary income, you can claim tax relief to avoid hardship that may arise as a result of progressive tax rates. In these cases, at least the basic tax rate must be applied.