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Tax shake-up means up to €160 more in 2012

The New Year has started prosperously for German workers, who will see their annual income increase by up to €160 thanks to tweaks made to the tax system.

Published: 2 January 2012 12:37 CET

Tax shake-up means up to €160 more in 2012

Photo:DPA

Small changes are made to tax laws at the start of each year, but more often than not they balance out, making little difference to the average worker’s bank account. This year is different.

Calculations published by the Süddeutsche Zeitung daily suggest that this year’s tax-code changes may make more of a difference than the hotly debated tax-cuts scheduled for 2013, with those earning between €24,000 and €66,000 set to benefit the most.

Economist Frank Hechtner from the Free University of Berlin, who calculated the results, said much of this increase was thanks to a change in the statutory pension scheme. In 2011, 19.9% of a person’s annual income was paid into their pension fund; in 2012 this figure will be 19.6%. This drop alone will see someone earning an average wage around €60 extra a year.

The amount of income that a person can write off as tax deductable has also risen from €920 to €1,000. This is the first time such a change has been made.

Higher-earners, who usually benefit most from tax cuts, will only benefit by an average of €65 a year, while those with lower and mid-range wages will do best.

This is due to an increase in the minimum earnings level at which a person gets the option of abandoning the statutory healthcare system and going private. From January 1, people have to earn at least €45,900 a year to opt for private health insurance – an increase of €1,350. The equivalent for pension and unemployment benefits rose by €1,200 to €67,200 a year.

This means that high-earners have to pay social contributions on more than €1,000 more of their earnings than they did until now.

Hechtner also worked out that the tax reductions planned for 2013 will only see workers earning an extra €76 that year. When the second stage of the reductions is implemented in 2014, however, there should be more of a noticeable difference.

The Local/jcw

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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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