Everything You Need to Know About German Tax

Germany is one of the most popular destinations for expats who want to enjoy a high quality of life, a rich culture, and a strong economy.

However, living and working in Germany also comes with some challenges, especially when it comes to taxes. The German tax system can be quite complex and confusing, especially for foreigners who are not familiar with the rules and regulations.

In this article, we will explain everything you need to know about German tax, from income tax to property tax, from withholding tax to capital gains tax, and from double taxation agreements to tax penalties. We will also provide you with a handy German tax calculator, and some useful tips on how to optimize your tax situation and save money.

Income tax in Germany

Income tax (Einkommensteuer) is the main tax that applies to your income from employment, self-employment, business, capital gains, and other sources. The income tax rate in Germany ranges from 0% to 45%, depending on your taxable income and your personal circumstances. In addition, you have to pay a solidarity surcharge (Solidaritätszuschlag) of 5.5% on your income tax, and a church tax (Kirchensteuer) of 8% or 9% if you belong to a registered religious community.

The income tax year in Germany is the same as the calendar year, and you have to file an annual tax return (Steuererklärung) by July 31 of the following year. You can file your tax return online, by mail, or with the help of a tax advisor (Steuerberater). You may be eligible for various deductions and allowances, such as personal allowance (Grundfreibetrag), child allowance (Kinderfreibetrag), and expenses related to your work, education, or health.

Withholding tax (Lohnsteuer)

If you are an employee in Germany, your employer will deduct income tax (Lohnsteuer) from your salary every month and pay it to the tax office (Finanzamt) on your behalf. The amount of withholding tax depends on your tax class (Steuerklasse), which is determined by your marital status, number of children, and other factors. There are six tax classes in Germany, from I to VI, with different tax rates and allowances.

You can change your tax class once a year, or more often in certain situations, such as marriage, divorce, or birth of a child. Changing your tax class may affect your net income and your tax refund or liability at the end of the year. You can check your tax class on your payslip (Lohnabrechnung) or your electronic tax card (ELStAM).

German tax calculator

If you want to estimate your income tax and net income in Germany, you can use a German tax calculator.

There are many online tools that can help you with this, such as this one. You just need to enter some basic information, such as your gross income, tax class, and state (Bundesland), and the calculator will do the rest. You can also adjust the settings to include other factors, such as health insurance, pension contributions, and childcare costs.

However, keep in mind that these calculators are only for guidance and may not reflect your exact tax situation. They may not include all the deductions and allowances that you are entitled to, or the latest tax rates and laws.

Therefore, you should always consult a tax advisor or the tax office for professional advice and accurate calculations.

Read more: Financial Planning for Nurses: How to Achieve Financial Wellness as a Nurse

Real property tax (Grundsteuer)

If you own a property in Germany, you have to pay real property tax (Grundsteuer) every year. The amount of real property tax depends on the value of your property, the type of property, and the local tax rate.

The value of your property is determined by the tax office, based on an outdated system that dates back to 1964 in West Germany and 1935 in East Germany.

The type of property is classified into two categories: A for agricultural and forestry land, and B for residential and commercial buildings. The local tax rate is set by each municipality, and varies widely across Germany.

The real property tax is usually paid in quarterly installments, either by direct debit or bank transfer. You can deduct the real property tax from your income tax as an expense, if you use the property for business purposes or rent it out.

However, if you live in your own property, you cannot deduct the real property tax from your income tax.

Other taxes in Germany

Apart from income tax and real property tax, there are other taxes in Germany that you may have to pay, depending on your situation. Some of these taxes are:

Licence fee (Rundfunkbeitrag)

The licence fee (Rundfunkbeitrag) is a mandatory fee that every household in Germany has to pay to support the public broadcasting service (ARD, ZDF, and Deutschlandradio).

The licence fee is currently 17.50 euros per month, regardless of the number of people, devices, or vehicles in the household.

You have to register your address with the licence fee office (Beitragsservice) and pay the fee every three months. You can apply for an exemption or a reduction of the licence fee, if you are a student, a low-income earner, or a person with a disability.

Read mored: Cost of Living in Germany

Motor vehicle tax (Kraftfahrzeugsteuer)

The motor vehicle tax (Kraftfahrzeugsteuer) is a tax that you have to pay for owning and using a motor vehicle in Germany. The amount of motor vehicle tax depends on the type, size, weight, and emission level of your vehicle.

The motor vehicle tax is collected by the federal customs administration (Zoll), and you have to pay it annually or biannually. You can check the motor vehicle tax for your vehicle online, using this tool.

Dog tax (Hundesteuer)

The dog tax (Hundesteuer) is a tax that you have to pay for owning a dog in Germany. The dog tax is levied by each municipality, and the amount varies depending on the location, the number, and the breed of your dog.

The dog tax is usually paid annually, and you have to register your dog with the local authorities and get a dog tag (Hundemarke) for identification.

The dog tax is not a deductible expense, and it does not cover the costs of veterinary care, dog food, or dog insurance.

Property sales tax (Grunderwerbssteuer)

The property sales tax (Grunderwerbssteuer) is a tax that you have to pay when you buy a property in Germany. The property sales tax is calculated as a percentage of the purchase price of the property, and the rate varies from 3.5% to 6.5%, depending on the state where the property is located.

The property sales tax is paid by the buyer, and it is usually due within two weeks after the signing of the purchase contract. The property sales tax is not a deductible expense, and it does not include the costs of notary fees, land registry fees, or real estate agent fees.

Capital and capital gains tax (Abgeltungsteuer)

The capital and capital gains tax (Abgeltungsteuer) is a tax that applies to your income from capital investments, such as interest, dividends, and profits from the sale of shares, bonds, or funds.

The capital and capital gains tax rate in Germany is 25%, plus the solidarity surcharge and the church tax, if applicable. The capital and capital gains tax is withheld at source by your bank or broker, and you do not have to report it in your tax return, unless you have a lower personal tax rate or you want to claim some deductions or allowances.

Inheritance and gift tax (Erbschafts- und Schenkungssteuer)

The inheritance and gift tax (Erbschafts- und Schenkungssteuer) is a tax that applies to your assets that you inherit or receive as a gift from someone. The inheritance and gift tax rate in Germany ranges from 0% to 50%, depending on the value of the assets, the degree of relationship between the donor and the recipient, and the type of assets.

There are some exemptions and allowances that you can use to reduce or avoid the inheritance and gift tax, such as personal allowance (Freibetrag), spouse allowance (Ehegattenfreibetrag), and child allowance (Kinderfreibetrag).

Double taxation agreements

If you are an expat in Germany, you may have to pay taxes in both Germany and your home country, depending on your tax residency status and the source of your income.

To avoid or reduce double taxation, Germany has signed double taxation agreements (Doppelbesteuerungsabkommen) with more than 90 countries, including the US, the UK, Canada, Australia, and India.

These agreements define which country has the right to tax your income, and how to claim a tax relief or a tax credit for the taxes that you have already paid in the other country.

You can check the list of double taxation agreements that Germany has with other countries online, using this link. You can also consult a tax advisor or the tax office for more information and guidance on how to apply the double taxation agreements to your specific situation.

German tax penalties

If you fail to comply with the German tax laws and regulations, you may face some penalties and consequences, such as:

• Late filing penalty: If you file your tax return after the deadline of July 31, you may have to pay a late filing penalty of 0.25% of the tax liability per month, up to a maximum of 25%.

• Late payment penalty: If you pay your tax liability after the due date, you may have to pay a late payment penalty of 1% of the overdue amount per month.

• Interest: If you have an outstanding tax liability or a tax refund, you may have to pay or receive interest of 0.5% per month.

• Fines: If you make a mistake, omit something, or provide false information in your tax return, you may have to pay a fine of up to 50,000 euros, or even face criminal prosecution in severe cases.

To avoid these penalties, you should file your tax return on time, pay your tax liability promptly, and check your tax return carefully for accuracy and completeness. You can also seek professional help from a tax advisor or the tax office, if you have any questions or doubts about your tax situation.

Conclusion

 To recap, in this comprehensive guide, we covered everything you need to know about German tax as an expat.

From understanding the tax system and obligations, to navigating deductions and exemptions, we've provided you with a wealth of information to help you confidently navigate your tax responsibilities in Germany.

Thank you for taking the time to read this article. We hope it has been informative and that you now feel more prepared to tackle your German tax obligations.

If you have any questions or encounter any problems related to the content discussed in this guide, please don't hesitate to leave a comment below.

Our team is here to support you and provide any additional assistance you may need.

Frequently Asked Questions about German Tax 

What are the basic tax obligations for expats in Germany?

Expats living and working in Germany are subject to various tax obligations. These include income tax, solidarity surcharge, church tax (if applicable), and trade tax (for self-employed individuals). It's important to understand and fulfill these obligations to avoid any legal issues.

How is income tax calculated in Germany?

Income tax in Germany is calculated based on a progressive tax system. The tax rates increase as the income level rises. There are different tax brackets and corresponding rates, with the highest bracket having the highest rate. Additionally, certain deductions and allowances can be claimed to reduce the taxable income.

What is the Solidarity Surcharge in Germany?

The Solidarity Surcharge, also known as Solidaritätszuschlag, is an additional tax imposed on personal and corporate income tax in Germany. It was initially introduced to support the costs of reunification between East and West Germany. The current rate is 5.5% of the income tax amount.

Do expats have to pay church tax in Germany?

Expats in Germany may have to pay church tax if they are registered as a member of a recognized religious community. The church tax is typically 8-9% of the income tax amount and is used to support religious institutions in Germany. It's important to note that this tax is optional, and individuals can opt-out by deregistering from the church.