How to determine the taxable income?
How is taxable income calculated?
Taxable income is determined according to a fixed scheme. The first step is to calculate and add together the income from the seven types of income:
- Income from agriculture and forestry: Operating income minus operating expenses.
- Income from business operations: Operating income minus operating expenses.
- Income from self-employment: Operating income minus operating expenses.
- Income from employment: Income minus income-related expenses (at least the employee allowance). For pension payments, the pension allowance and the supplement to the pension allowance are also deducted.
- Income from capital assets: Income minus income-related expenses (at least the income-related expenses allowance) and saver’s allowance. If capital gains are included in the assessment, a deduction for foreign withholding tax is also possible.
- Income from renting and leasing: Income minus income-related expenses.
- Other income: Income minus income-related expenses (at least the income-related expenses allowance).
Scheme for calculating taxable income:
| Operator |
Calculation step |
| |
Total income from the types of income |
| ./. |
Old-age relief amount |
| ./. |
Relief amount for single parents |
| ./. |
Allowance for farmers and foresters |
| Result: Total income |
| ./. |
Loss deduction (loss carryforward from the previous year) |
| ./. |
Special expenses |
| ./. |
Extraordinary burdens |
| + |
Reimbursement surplus for health insurance or church tax (§ 10 para. 4b EStG) |
| Result: Income |
| ./. |
Allowances for children |
| ./. |
Hardship allowance |
| Result: Taxable income |
How to determine the taxable income?
Which income replacement benefits are subject to the progression clause?
Wage or salary replacement benefits are paid when your employer no longer pays the full salary for certain reasons. These benefits are tax-free, but they are subject to the progression clause. This means they are used to calculate the tax rate, which can result in the remaining income being taxed at a higher rate.
Why is the progression clause important?
Including wage replacement benefits in the progression clause can lead to a higher tax burden. Therefore, all affected benefits must be declared in the tax return.
Which wage replacement benefits are subject to the progression clause?
- Unemployment benefit I
- Short-time work allowance and seasonal short-time work allowance
- Insolvency benefit in the event of employer insolvency
- Parental allowance (under the Federal Parental Allowance and Parental Leave Act, but not the childcare allowance since 1 August 2013)
- Maternity benefit and maternity benefit supplement
- Sickness, injury, and transitional benefits for disabled persons or similar benefits
- Top-up amounts and partial retirement allowances (under the Partial Retirement Act or civil service law)
- Income security benefits for older employees (through the employment agency)
Reporting requirements and evidence
- Obligation to submit a tax return: If tax-free wage replacement benefits of more than 410 Euro per year were received, there is a legal obligation to submit a tax return.
- Certificate from benefit providers: The benefit providers, such as the employment agency or health insurance companies, issue a certificate for the tax office. This contains details of the benefits received and is electronically transmitted to the tax office.
- Benefits from the employer: Benefits such as short-time work allowance or maternity benefit supplements paid directly by the employer are listed in the printout of the electronic payslip.
Electronic reporting
Since 2011, benefit providers have been required to report the wage replacement benefits paid electronically to the tax office, including the tax identification number. This simplifies the processing of the tax return and reduces errors.
Conclusion: The tax-free payment of wage replacement benefits can still result in a higher tax burden due to the progression clause. Therefore, it is important to correctly declare all relevant benefits and use the provided evidence in the tax return. A tax programme such as Lohnsteuer kompakt can help to correctly record the information and calculate the tax impact.
Which income replacement benefits are subject to the progression clause?
How do wage and income replacement benefits increase my tax rate?
How do wage and income replacement benefits increase my tax rate?
Wage replacement benefits, such as unemployment benefit or parental allowance, are tax-free, but they are subject to the progression clause. This means that these incomes are taken into account when calculating your tax rate. As a result, the tax rate applied to your remaining income increases. This may lead to you having to pay additional taxes or receiving a lower tax refund.
How does the progression clause work?
The tax-free wage replacement benefits are added to your income to determine the tax rate. This higher tax rate is then applied to the taxable income.
- Consequence: Even income below the basic allowance can be indirectly taxed due to the higher tax rate.
Example calculation
A single mother earns 26.000 Euro gross per year and receives an additional 6.000 Euro parental allowance.
- Total income: 32.000 Euro
- Income tax (based on total income): 6.198 Euro (tax rate: 19.4%)
- Actually taxed: Only the income without parental allowance (26.000 Euro)
- Income tax: 5.044 Euro
Without progression clause: Tax for 26.000 Euro is only 4.333 Euro. Additional tax: 711 Euro due to progression clause. The solidarity surcharge and, if applicable, church tax also increase accordingly.
Basic allowance and progression clause
- Above the basic allowance: If your income including wage replacement benefits exceeds the basic allowance, the increased tax rate is applied.
- Below the basic allowance: If your income, even with wage replacement benefits, is below the basic allowance, it remains tax-free, and the progression clause is not applied.
Exception: Only wage replacement benefits
If you receive only wage replacement benefits throughout the year, your income remains tax-free, as the progression clause does not apply in this case.
Repayment of wage replacement benefits
If you have received too much wage replacement benefit, such as unemployment benefit, and have to repay it, this can reduce your tax rate. In this case, submit a tax return to benefit from negative progression.
- Note: If you have no taxable income in the relevant year, the repayment has no tax implications.
Tip: Use a tax programme such as Lohnsteuer kompakt to accurately calculate the impact of wage replacement benefits and the progression clause on your tax burden. A tax advisor can also help you avoid additional tax payments or optimise refunds.
How do wage and income replacement benefits increase my tax rate?
What are the advantages of the splitting tariff?
The income splitting method is a special taxation procedure applied when joint assessment is chosen by married couples and civil partnerships. This method can provide significant tax relief, especially when the partners have different income levels.
How does the income splitting method work?
- Combine incomes: The taxable incomes of both spouses are added together.
- Halve the income: The total income is then halved to reduce tax progression.
- Calculate the tax: Income tax is calculated for the halved income and then doubled.
Advantages of the income splitting method
- Lower tax rate with income differences: The income splitting method results in a lower average tax rate when one partner earns significantly more than the other. This makes the tax burden more equitable between spouses.
- Tax relief for single-earner marriages: Couples where only one partner earns an income benefit particularly, as the income is split as if both partners earn equally.
- Flexibility with income variations: Even with income fluctuations or temporary income losses (e.g. parental leave or illness), the income splitting method can offer tax advantages.
When is the income splitting method not advantageous?
- Similar incomes: If both spouses have nearly equal incomes, the income splitting method offers no tax advantage over individual assessment.
Requirements for the income splitting method
- The partners must be married or in a civil partnership.
- Both partners are fully taxable.
- They must have lived together for at least one day of the tax year.
Conclusion: The income splitting method offers noticeable tax relief, especially for couples with large income differences. For couples with similar incomes or specific tax situations, it is worth comparing with individual assessment. A tax programme like Lohnsteuer kompakt or advice from a tax expert can help choose the optimal assessment type.
What are the advantages of the splitting tariff?
