(2023) Child tax allowances pay off

As children, like their parents, are entitled to annual allowances for income tax, the tax burden can be legally reduced. Even though the saver's allowance is not exhausted as quickly as it used to be due to persistently low interest rates, parents should consider to what extent it makes sense to spread capital gains.

For example, with an interest rate of 2.5 percent, you need to invest over 40.000 Euro to exceed the saver's allowance of 1.000 Euro. Children can also benefit from the following increased tax exemptions if they have income solely from capital assets:

• Basic allowance 10.908 Euro
• Saver's allowance 1.000 Euro
• Special expenses allowance 36 Euro
• Total tax-free (per child) 11.944 Euro

This means: Interest, dividends and other income from capital assets, including profits from the sale of securities acquired after 2008, are tax-free up to 11.184 Euro this year.

The gift of capital assets to children is exempt from gift tax up to an amount of 400.000 Euro per child. However, the tax authorities will only recognise a transfer of assets within the family if it is not carried out solely for tax avoidance purposes. The gift must therefore comply with civil law regulations and be credible. The minimum requirement for this is an account or deposit in the child's name.

In addition, parents may no longer be able to access the gifted capital and its interest for their own purposes. It should also be noted that children with high incomes must pay their own contributions to statutory health insurance. For other funding measures such as BAföG, certain income and asset limits must be observed. For larger, more complex asset transfers, it is therefore advisable to seek legal and tax advice beforehand.