In 2014 an income of less than €8,354 is tax-free for a single person (€16,708 for a married couple). Incomes up to €52,882 for a single person (€105,764 for a couple) are then taxed with a rate progressively increasing from 15% to 42%. Incomes over €52,882 (€105,764) are taxed at 42%. In addition to this there is the "solidarity surcharge" of 5.5% of the tax to cover the costs of integrating the states of the former East Germany.
Deductions are granted for circumstances such as children under 18 (or under 27 if still attending school and without earnings), specified insurance premiums, charitable and political contributions to German entities up to certain limits and unavoidable extraordinary expenses above a certain limit (such as illness).
Deductions from compensation are also made for four social programs; retirement, unemployment, health insurance and long-term nursing care. Payments for these programs are borne equally by the employer and the employee. The employer's share of contributions is not considered as taxable income to the employee and the employee's portion is tax deductible up to a certain limit.
If an individual is subject to German tax, generally most sources of income are then taxable. The Lohnsteuer (wage tax), which alone accounts for a third of the German government's revenue, is withheld at source from compensation. Income from other sources (e. g. self-employment, fees for services, rent collections, investments and the like) are covered by the Einkommensteuer (income tax).
The Lohnsteuer differs from the Einkommensteuer only by the method of collection. The Lohnsteuer is collected at source and paid directly to the Finanzamt (tax office) by the employer while the individual must pay the Einkommensteuer himself. Therefore the Lohnsteuer is comparable to the income tax withholding shown on the U.S. Form W-2 (Lohnsteuerkarte).
Based primarily on your final payment for the previous year, the Finanzamt will estimate your tax for the current year and require you to make prepayments (Vorauszahlungen) of a quarter of the tax on March 10, June 10, September 10 and December 10. The total tax liability is determined by filing an income tax return, which includes all types of income from all sources. Wage tax withholding as well as provisional payments are deducted from this total tax liability so that a refund or final tax payment is assessed. The tax assessment is usually issued by the Finanzamt between two and six months from the date the return is filed. No payment will be due before receipts of the tax assessment notice.
Every tax return is under audit, therefore if the tax assessment is issued and is not preliminary, the assessment can only be changed in the future by the occurrence of extraordinary circumstances (e. g. tax evasion).
As a rule, the income tax return (Einkommensteuererklärung) should be filed by May 31 of the year following the one in which the income was received. If you use the assistance of a certified tax adviser (Steuerberater), you have an automatic extension to file until December 31. There may be penalties and interest assessed if the return is filed late.
There are a few situations where the taxpayer is required to pay taxes even though the income is less than the personal allowance, especially when tax-exempt income (such as foreign-sourced income) must be considered for the determination of the applicable income tax rate (progression clause). Taxes are then assessed based on a sliding scale.
See also what Wikipedia writes about the German taxation system.
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