If an expatriate living in Germany is going to work in Germany, they may be subject to German income taxes. Paying taxes in Germany is similar to paying taxes in the United States. Throughout the year, income tax is deducted from an individual’s salary and paid by the employer to the German tax office. Then, at the end of the year, the individual’s total tax liability is determined. The person will then be issued either a refund or a bill to pay the tax office.
The German tax brackets are relatively simple. Lower income individuals and households pay no income tax. Mid-level incomes pay between 4 and 42 percent depending on their income, and higher income individuals and households pay 45 percent. There is an additional charge of 5.5 percent of the tax to be paid because of the costs of integrating the former East German states.
There are two types of income taxes. There is a wage tax, called Lohnsteuer, which is pulled directly from an individual’s paycheck and is paid to the tax office by the employer. The other type of income tax, called Einkommensteuer, covers all other sources of income such as self-employment, service fees, rent collection, and investments. This income tax is paid by the individual.
Certain tax deductions are applicable in certain situations. Some of those deductions include children under the age of 8, children under the age of 27 who are in school and not earning an income, specified insurance premiums, unavoidable and extreme expenses such as a major illness, charitable contributions, and political contributions up to certain amounts.
There are also specific deductions made from an individual’s income to social entities. Those entities are retirement, unemployment, health insurance, and long-term nursing care. The money contributed to these entities by an individual is tax deductible to a certain limit. If an employer matches the contribution, the employer’s contribution is not taxed.
There is a tax in Germany called the Mehrwertsteuer, or value added tax, which adds tax to each step in the production and delivery of goods and services. That flat tax rate of 9 percent is reduced to 7 percent for certain products such as food and printed material. It is also exempt for medical services, insurance services, exports of goods abroad, and services rendered abroad.
Some items have an additional tax, such as alcohol, tobacco, gas, tea, and coffee. There is also a church tax; however, that is only paid if an individual is officially associated with an established church. State run lotteries are taxed on the money they receive, but winners are not taxed on their winnings.
In Germany, taxes are collected by May 3. However, if an individual hires a tax consultant, that deadline is extended to September 30. Filing taxes late can incur penalties and interest.
Paying taxes in another country can be confusing and problematic. Due to the difficulties and confusion with filing taxes in another country, it is highly recommended that an individual hire a tax consultant to help everything run smoothly. For more information on the German tax system, click here. For the unofficial online tax calculator, click here.