The German tax system might seem like a daunting task, given its complexity and layers. However, fear not!
The process of filing taxes in Germany has become more accessible, thanks to user-friendly online tax filing systems available in English. In this guide, we’ll break down the essential aspects of the German tax landscape, and provide you with valuable and practical tips to making understanding taxes in Germany a whole lot easier.
Here’s a peek into what you’ll find in this guide:
✅ How Does the German Tax System Work?
✅ What Are the Tax Rates in Germany?
✅ Who Is Required to File a Tax Return in Germany?
✅ Deductions and Credits Available for Taxpayers in Germany
✅ Tax Implications for Expats Living and Working in Germany
✅ Applying for a Tax Identification Number in Germany
✅ Filing Taxes in Germany: Step-by-Step Guide
✅ Penalties for Not Filing a Tax Return in Germany
✅ Value-Added Tax (VAT) in Germany: Overview and Mechanisms
✅ Difference Between Steuer-ID and Steuernummer
Remember, while this guide provides comprehensive insights, it’s essential to seek advice from tax professionals or local tax authorities for personalized and up-to-date information.
Good news first?
It’s quite easy to file your taxes in Germany nowadays thanks to the many different online tax filing systems that are not only easy but also entirely in English. Here are a couple worth checking out:
However, while it’s great that Germany now has the option to file taxes in English, it is still important to understand the tax basics. Keep on reading!
How does the German tax system work?
Taxation in Germany is primarily based on a progressive income tax system, meaning that individuals with higher incomes pay a higher percentage of tax.
Like many other countries, the tax year in Germany starts on January 1st and runs until December 31st. By the end of May, taxpayers must file their tax returns for the previous year. If you’re hiring an accountant to do your taxes for you though, you will likely qualify for an extension (your accountant will let you know about this).
The German tax system offers several deductions, such as childcare expenses, charity donations, and costs related to professional development so make sure to save your receipts!
Self-employed individuals and freelancers in Germany have additional tax requirements, such as the payment of value-added tax (VAT) and the calculation of trade tax.
Foreigners living and working in Germany are subject to the same tax laws as German residents. However, they may be eligible for certain tax exemptions or deductions, depending on their status and circumstances.
What are the tax rates in Germany?
I know you’ve likely heard horror stories about tax rates in Germany. However, don’t let that scare you! Your earnings are only subject to tax once you’ve reached a certain threshold.
As of 2024, your tax-free allowance is 11,604€ (always subject to change).
Note: If you are married, this number is doubled. As soon as your income together reaches this threshold, you will then be required to start paying income tax on your additional money made.
Depending on your tax rate, you will be paying somewhere between 14% and 45%.
The tax rates for 2024* are as follows:
- For incomes up to €11,604, there is no income tax to be paid (basic personal allowance).
- For incomes between €11,604 and €66,760, the tax rate is 14% to 42%.
- For incomes between €66,760 and €277,825, the tax rate is 42%.
- For incomes above €277,825, the tax rate is 45%.
In addition to income tax, taxpayers in Germany are also subject to other taxes, such as solidarity surcharge (Solidaritätszuschlag) and church tax (Kirchensteuer) – which you can deregister for, which are assessed as a percentage of their income tax liability.
*It’s important to note that the tax rates and brackets may change from year to year, and the specific tax obligations for each individual depend on their circumstances, including their income level, residency status, and other factors. It’s always best to consult a tax professional or the local tax authority for the most up-to-date information on tax rates and obligations in Germany.
Who is required to file a tax return in Germany?
Filing a tax return in Germany is not always mandatory, although is highly recommended. Doing so can be beneficial as you may be eligible for tax refunds or deductions that you wouldn’t otherwise receive.
Firstly, if you are a resident in Germany and your income for the year exceeds the basic personal allowance (Grundfreibetrag) of €11,604 (as of 2024), you are generally required to file a tax return. This threshold applies to your total income from all sources, including employment income, self-employment income, rental income, and investment income.
In addition, there are certain situations where you may be required to file a tax return regardless of your income level. For example, if you have multiple sources of income, such as self-employment income or rental income, or if you have capital gains or investment income that exceeds certain thresholds, you may need to file a tax return.
Those who are legally required to submit an annual tax return include self-employed people and anyone who is generating “additional income” of more than *801 Euros annually in addition to their employed position. Additional income could include hobbies such as vlogging, blogging, influencing social media, rental income, investment gains, etc.
*Subject to change
What deductions and credits are available for taxpayers in Germany?
Taxpayers in Germany are eligible for several deductions and credits that can help reduce their overall tax liability. Some of the most common deductions and credits include:
- Work-related expenses: Taxpayers can deduct work-related expenses such as travel costs, work clothes, and job-related training expenses.
- Childcare expenses: Parents can deduct childcare expenses up to a certain amount, depending on the age of the child. We have a blog post all about how to do this!
- Donations: Taxpayers can deduct charitable donations to recognized non-profit organizations.
- Health-related expenses: Medical and dental expenses that are not covered by health insurance can be deducted.
- Pension contributions: Contributions to certain types of pension plans may be deductible.
- Home office expenses: Taxpayers who work from home may be eligible to deduct a portion of their housing expenses.
In addition to deductions, taxpayers in Germany may also be eligible for tax credits, such as the child tax credit, the basic tax credit, and the electric vehicle tax credit. These tax credits directly reduce the amount of tax owed. Here are 10 tax deductions you probably didn’t know you could deduct here in Germany!
What are the tax implications for expats living and working in Germany?
Expats living and working in Germany may be subject to various tax implications, depending on their circumstances.
Here are some key points to keep in mind:
- Residency status: Expats living and working in Germany for more than 183 days in a calendar year are considered residents for tax purposes and are subject to tax on their worldwide income.
- Tax treaties: Germany has tax treaties with many countries that can affect an expat’s tax liability. These treaties typically prevent double taxation and determine which country has the right to tax specific types of income. If you’re from the USA, you might want to look into our tax guide for Americans living in Germany.
- Social security contributions: Expats working in Germany may be required to make contributions to the German social security system, depending on their circumstances.
- Deductions and credits: Expats in Germany may be eligible for certain deductions and credits, such as the foreign earned income exclusion or the foreign tax credit, which can help reduce their tax liability.
- Tax return filing: Expats in Germany are required to file a tax return by May 31st of the following year if they earned income in Germany, regardless of whether taxes were already withheld from their salary.
- Additional reporting requirements: Expats may also be required to report foreign bank accounts, assets, and investments to the German tax authorities.
How can I apply for a tax identification number in Germany?
Everyone in Germany needs a tax identification number (otherwise known as a Steuer-ID, IdNr., Persönliche Identifikationsnummer, or Steueridentifikationsnummer).
If you’ve just moved to Germany and have already registered in your new city of choice, you should receive your tax identification number/Steuer ID automatically in the mail from the local Finanzamt (tax offices) in 2-3 weeks.
If you’ve just had a baby in Germany, they receive their Steuer ID shortly after registering their birth in Germany.
If you have not received your Steuer ID within 4-6 weeks of your registration in the city, don’t worry! It could have been lost in the mail, or maybe you forgot to put your last name on the mailbox… whatever it was, it can easily be solved!
All you need to do is go to your local Finanzamt (find out which Finanzamt is yours here) and request your Steuer ID.
Living in Düsseldorf? We have the exact steps you need in one concise blog post.
Once you have your tax identification number, you can use it to open a bank account, start a job, file your tax return, and conduct other financial transactions in Germany.
How do I file my taxes in Germany?
To file your taxes in Germany, you’ll need to follow these steps:
- Gather all the necessary documents, including your income statements, bank statements, and any receipts or invoices for deductible expenses.
- How you would like to file your taxes:
– On your own using an online program
– With a tax consultant/accountant - Submit your tax return to the tax authority, either electronically or by mail.
- Wait for your tax assessment, which will detail the amount of taxes owed or any refund due. If you owe taxes, you will need to pay them by the deadline specified in the assessment. The bank number (IBAN #) will be included in this assessment letter.
What are the penalties for not filing a tax return in Germany?
In Germany, failing to file a tax return or submitting a late tax return can result in penalties and fines. Here are some possible penalties for not filing a tax return in Germany:
- Late filing penalty: If you fail to file your tax return by the deadline, you may be subject to a late filing penalty. The penalty can range from €25 to €10,000 depending on the severity and duration of the delay.
- Late payment penalty: If you owe taxes and fail to pay them by the deadline, you may be subject to a late payment penalty. The penalty is usually 1% of the outstanding tax per month of delay.
- Interest charges: If you owe taxes and fail to pay them by the deadline, you may also be subject to interest charges on the unpaid amount. The interest rate is currently set at 0.5% per month.
- Criminal charges: In severe cases, such as deliberate tax evasion or fraud, criminal charges may apply. The penalties for tax fraud can include fines, imprisonment, and other sanctions.
It’s important to note that penalties and fines can quickly accumulate, making it essential to file your tax return on time and pay any taxes owed promptly.
If you are struggling to meet your tax obligations or have any questions, it’s best to seek advice from a tax professional or the local tax authority.
What is the value-added tax (VAT) in Germany and how does it work?
In Germany, the value-added tax (VAT) is a consumption tax that is added to the price of most goods and services. The standard VAT rate in Germany is 19%, although a reduced rate of 7% applies to certain goods and services, such as food, books, and public transportation.
If you are self-employed, it’s important to know that businesses that are registered for VAT must collect the tax on behalf of the government and pay it to the tax authority. VAT-registered businesses can deduct the VAT they pay on their purchases and expenses. This means that businesses effectively only pay VAT on the value they add to a product or service.
What is the difference between a Steuer ID and a Steuernummer?
In Germany, both the Steuer ID (Steueridentifikationsnummer) and Steuernummer (tax number) are unique identification numbers used for tax purposes, but they have different functions.
The Steuer ID is a permanent, personal identification number that is assigned to every German resident for tax purposes. It is an 11-digit number that is unique to each individual and is used to identify taxpayers across different tax offices and for various tax-related transactions. The Steuer ID is assigned by the Federal Central Tax Office (Bundeszentralamt für Steuern) and does not change throughout a person’s life, even if they move or change jobs.
On the other hand, the Steuernummer is a tax identification number that is assigned to businesses, self-employed individuals, and freelancers by their local tax office (Finanzamt). It is used to identify a business or self-employed individual for tax purposes and is different from the Steuer ID.
The Steuernummer is a 10- or 11-digit number that is specific to a taxpayer’s local tax office and is used for tax-related correspondence, such as tax returns and payments. Unlike the Steuer ID, the Steuernummer can change if a business or individual moves to a different tax office.
I am not an accountant or tax professional, so please if you have any questions, It’s always important to get financial advice from an accountant or tax professional. You can also go to your local Finanzamt for more information.
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