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- Income tax is a direct tax on the income of natural persons and an important source of revenue for the German state.
- Regulations are based on the Income Tax Act(EStG) and the Income Tax Implementation Ordinance(EStDV).
- Taxation is progressive: 14% initial tax rate, up to 45% top tax rate for very high incomes.
- Taxpayers are natural persons resident in Germany or those with income from Germany.
- Special features: Joint assessment, loss offsetting and various tax concessions, such as for handyman services.
- Double taxation agreements(DTAs) regulate taxation rights in the case of international income and emigration.
- Current discussions include tax simplification, digital processes and ecological tax reforms.
Definition and legal basis:
Income tax is a direct tax on the income of natural persons and is one of the most important sources of revenue for the German state. It is regulated in the Income Tax Act (EStG) and is based on the principle of taxation according to economic performance. Income tax was first introduced in Germany in 1891 and has undergone numerous reforms since then.
In addition to the Income Tax Act (EStG), the Income Tax Implementation Ordinance (EStDV) and numerous administrative directives and guidelines form the legal basis. Income tax law is complex and subject to constant change, which means that tax returns and calculations need to be updated regularly.
Taxpayers and types of income:
All natural persons who are resident or ordinarily resident in Germany (unlimited tax liability) and persons who earn income in Germany without being resident here (limited tax liability) are liable for income tax. The EStG distinguishes between seven types of income:
1. income from agriculture and forestry
2. Income from business operations
3. Income from self-employment
4. Income from employment
5. Income from capital assets
6. Income from letting and leasing
7. Other income within the meaning of § 22 EStG
The sum of the income from these sources, less certain deductions and allowances, results in the taxable income to which the income tax rate is applied.
Calculation and tax rate:
Income tax is calculated in several steps:
1. determination of income from the various types of income
2. Consideration of special expenses and extraordinary expenses
3. Application of allowances (e.g. basic allowance)
4. Application of the income tax rate to the taxable income
The income tax rate is progressive, i.e. the tax rate rises with increasing income. It starts with an initial tax rate of 14% (after taking into account the basic tax-free allowance) and reaches a top tax rate of 45% for very high incomes (wealth tax). In addition, the solidarity surcharge is levied, which has been abolished for most taxpayers since 2021.
Special features and design options:
Income tax law offers numerous special features and structuring options:
1. joint assessment: Spouses and registered partners can choose between single and joint assessment.
2. offsetting losses: Losses can be offset within one type of income and partly between types of income.
3. tax concessions: There are various tax concessions, e.g. for handyman services or energy-efficient renovation measures.
4. Retirement Income Act: regulates the gradual changeover to deferred taxation of retirement income.
5. investment deduction: Allows investments by small and medium-sized enterprises to be taken into account in advance.
6 Withholding tax: A separate tax rate of 25% (plus solidarity surcharge and church tax, if applicable) applies to capital income.
Disposition and collection:
Income tax is generally levied by way of assessment. Taxpayers must submit an annual income tax return, on the basis of which the tax office assesses the tax. In the case of employees, income tax is withheld and paid by the employer as an advance payment on income tax.
Important aspects of tax assessment are:
– Deadlines for submitting tax returns
– Possibility of electronic submission (ELSTER)
– Advance payments for self-employed persons and tradespeople
– Tax consideration of pension expenses
International aspects:
Double taxation agreements (DTAs) play an important role in the international context. They regulate which country has the right of taxation in cross-border cases. Other relevant aspects are
– Exit taxation in the event of relocation abroad
– Taxation of income from foreign sources
– Special rules for cross-border commuters and expatriates
– Measures against tax evasion and aggressive tax planning
Current developments and discussions:
Income tax is regularly the subject of political and economic debate:
1. tax simplification: There are repeated calls for a simplification of the complex income tax law.
2. rate adjustments: Discussions on adjusting the tax rate, particularly with regard to the middle-class bulge and the top tax rate.
3. digitalization: increasing importance of digital tax returns and automated assessment processes.
4. ecological tax reform: proposals for greater consideration of ecological aspects in the tax system.
5. international harmonization: efforts to harmonize tax regulations at EU and OECD level.
In summary, income tax is a central element of the German tax system and has a significant impact on the financial situation of citizens. Its structure influences economic decisions and is an important instrument of redistribution and economic policy. The complexity of income tax law presents a challenge for both taxpayers and the tax authorities, but also offers opportunities to optimize the individual tax burden.
