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Middle-income earners to keep hundreds of euros under proposed tax plan

If the Social Democrats (SPD) eventually agree to join another coalition with Angela Merkel, middle income earners will feel the benefit in their pockets, the Frankfurter Allgemeine Zeitung (FAZ) reports.

Published: 17 January 2018 10:10 CET

Middle-income earners to keep hundreds of euros under proposed tax plan

Photo: DPA

Under the terms of the proposed coalition deal, a singleton on €40,000 a year will be paying €600 less in tax by 2021, FAZ reported on Wednesday based on calculations by the Taxpayers’ Association.

The SPD leadership agreed on the proposed deal with Merkel’s Christian Union after five days of talks earlier this month. But the centre-left party must now convince their membership to back the deal.

Overall, the coalition deal offers tax relief across the pay spectrum. A single-income family with two children on a salary of €40,000, for instance, can expect to have €860 more at their disposal by 2021.

The savings will come in different ways depending on people’s familial situation. Unmarried people without children will feel the benefit mainly through the abolishment of the Solidarity Tax for low and middle income earners.

The tax was introduced after reunification to pay for the rebuilding of eastern Germany. But, with the eastern states having made progress in modernizing infrastructure, conservative parties have for several years wanted to phase it out. People who earn over €54,000 will continue to pay the tax.

Singletons will also feel the benefit of a change in the way social security contributions will be distributed. Someone on a €25,000 salary will save €163 in this way.

Families – already exempt from paying the Solidarity Tax – will benefit mainly from an increase in child support payments, which are set to increase by €25 a month.

Research by the OECD last year showed that Germany has the second highest tax burden worldwide after Belgium.

The OECD calculated each country's tax wedge – the gap between what employers take home in pay and what it costs to employ them, including personal income tax and social security contributions.

Germany had a tax wedge for single, childless workers of 49.4 percent, behind Belgium at 54 percent. That means nearly half of a single person's income currently goes towards taxes and social security contributions in Germany.

EXPLAINED: Do I have to declare income from foreign sources on my German tax return?

If you’re filling in a German tax return, you are generally legally required to declare and pay tax on all income you earn – wherever in the world you earn it. This is true even if you keep the money abroad.

In most cases, your worldwide income is subject to what’s called “unlimited tax liability” – which means that there’s no exemptions or discounts on your taxes for money earned abroad – whether its from work or capital gains like the sale of stocks. This is generally even true if Germany doesn’t have a Double Taxation Agreement (DTA) with the other country in question.

If, however, Germany does have a DTA – some of your tax might end up getting limited in Germany. This is generally providing that you’ve paid it in the other country.

For example, the US may apply a withholding tax to payments made to you for freelance services you provide in the US, for example. In this case, the DTA between Germany and the US would allow you to submit documentation proving that you’ve already paid tax on this payment in the US. That’ll prevent you from having to pay tax again in Germany on the amount that actually gets wired to your account.

READER QUESTION: How can I find a German tax advisor?

Who has a double taxation treaty with Germany?

Germany has concluded double taxation agreements with numerous – but not all – countries and territories. You can check out the German government’s dropdown menu here to see which countries are on the list.

German residents earning money in other EU countries should still check this list, as certain tax provisions may be unique to the two countries in question.

READ ALSO: Everything you need to know about paying taxes in Germany

What about rental income?

As a general rule, rental income is taxed in the country where the property is located, meaning you don’t have to declare or pay it in Germany. There are some notable exceptions – for example if the property is located in Spain. In this case, you would report this income in Germany.

What about inheritance?

Some double taxation agreements have clauses that specifically govern what tax rules there are around inheritance that a German resident might get from abroad.

In general, the inheritor will still have to pay inheritance tax in Germany, but could see their tax liability reduced if tax already has to be paid abroad.

There are also other exceptions possible, such as if a child receives a property in their parent’s will and then proceeds to live in it for at least 10 years after they acquire it. In this case, they may not need to pay any tax on it.

In certain complicated cases – or if you have any doubt – it may be a good idea to seek out the services of a professional tax advisor who can make sure you don’t get in trouble with the Finanzamt (tax office).

READ ALSO: Do foreigners owe tax in Germany on money that is inherited from overseas?

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