Meaning of Income Tax

Income tax is one of the most important sources of income for the German state. More than 200 billion euros flow to the tax authorities from this tax, which corresponds to around a third of the total tax revenue.

  • The state levies income tax on different types of income such as salary or rental income.
  • As your income increases, so does the percentage tax rate.
  • Anyone who is obliged to submit an income tax return must report their income from the past calendar year to the tax office by the end of July of the following year at the latest.

Definition: what is income tax?

Anyone who earns income as a resident of the Federal Republic of Germany must pay part of it to the state as income tax. Which types of income are taxed, how the tax burden is calculated and which regulations have to be observed are set out in the Income Tax Act (EStG).

Short for IT by abbreviationfinder, income tax is a community tax that is paid to the federal government as well as the federal states and the municipalities according to a certain distribution key.

Income tax liability: when do I have to pay income tax?

The basic requirement for income tax liability is that the taxpayer is a natural person. Legal entities such as GmbHs or stock corporations do not pay income tax on their profits, but pay corporation tax.

The types of income

In the EStG, the legislature defines seven types of income on which the tax authorities levy income tax. Specifically, it is about income

  • from agriculture and forestry
  • from commercial operations such as trade or craft
  • from independent work in freelance professions such as doctor, lawyer or tax advisor
  • from employment
  • from capital assets such as interest or dividends
  • from rental and leasing
  • from other sources of income listed in Section 22 of the Income Tax Act. These include pension income or profits from private sales transactions.

The difference between wage tax and income tax

If employees look at their pay slip, they will find the wage tax deduction there. This is not a separate type of tax, but a special form of collection of income tax.

The employer withholds a certain part of the wages as wage tax and pays this to the tax office. This means that wage tax is practically an advance payment on income tax. On the basis of an income tax return prepared afterwards, an additional payment or reimbursement can then result depending on further income or expenses.

How much is the income tax?

Income tax is calculated from the sum of the income in the individual types of income. However, these are not to be equated with the income. Because: The taxpayer can deduct the directly related expenses from the income. In the case of wages, these are, for example, the travel costs to the workplace or, in the case of income from renting and leasing, the costs for repairs in the rented apartment.

Taxpayers can claim additional deductions before determining their taxable income. These include, among other things, special expenses such as school fees and childcare costs, expenses for retirement provisions or lump sums for family members with disabilities.

What is collectively agreed income tax?

In Germany, income tax is calculated using a tariff that is specified in Section 32a of the Income Tax Act. The following tariff zones apply:

  • The first zone applies until the basic tax-free amount is reached. Single people who have less taxable income than the basic tax allowance do not have to pay any income tax.
  • In the second and third zones, the tax rate increases gradually, with the lowest rate being 14 percent and the top tax rate being 42 percent of taxable income.
  • In the fourth zone, the tax rate remains at 42 percent.
  • For income shares beyond this, the tax rate in the fifth tariff zone is 45 percent.

How is income tax calculated?

In calculating income tax, the principle is that the highest applicable tax rate is only applied to the topmost portion of income. As a result, taxpayers with high incomes also benefit proportionally from the basic tax allowance and the low input tax rates.

Example : If you are a single person with a taxable annual income of 60,000 euros, you pay a tax rate of 42 percent for the portion of your income in the fourth tariff zone. In relation to total income, however, the income tax of around 16,400 euros only corresponds to an average tax rate of 27.3 percent.

Income tax return and tax assessment

The tax office determines the amount of income tax by checking the income tax return prepared by the taxpayer and determining the tax amount on the basis of the income declared there.

When do I have to prepare my tax return?

Whether a citizen is required to submit an income tax return does not only depend on whether his income exceeds the basic tax allowance. Under certain conditions, employees are exempt from the declaration requirement. Important prerequisites are among others:

  • The taxpayer and his or her spouse do not have tax class IV or V.
  • No allowance is entered in the electronic income tax card.
  • There are only income taxable wage payments from a single employer.
  • In addition to the salary, the taxpayer has no other income from other types of income.

But even in such cases, employees can voluntarily submit a tax return if they hope to receive a refund from the tax office.

Those who are required to submit an annual income tax return must submit this to the tax office by the end of July of the following year. This particularly affects the self-employed, landlords and taxable pensioners.

When can prepayments be expected?

Because the income tax is set retrospectively for the previous calendar year, the tax office has the right to collect advance payments.

The most recently declared income is the basis for the amount of the advance payments. The tax office divides the assessed tax by four and collects the resulting amount in four installments on March 10, June, September and December.

Because wage tax collection is also an advance payment, income from employment is generally not taken into account when determining the quarterly advance payments. Otherwise, the following applies: The tax office only sets advance payments if they amount to at least 400 euros per calendar year.


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