If classes III and V taxes are abolished

The Bundesfinanzministerium intends to reform tax classes, affecting the popular combination III and V for married couples. Here's what it means and what to do about it.

"We want to further develop family taxation to strengthen partnership responsibility and economic independence, considering all family forms. In the context of improved digital interaction between taxpayers and the financial administration, we will transfer the combination of tax classes III and V into the factor method of tax class IV, which is then easily and bureaucratically applicable and creates more fairness."

According to the traffic light coalition's government program, these plans should be implemented by 2025, and tax classes III and V should be transferred into tax class IV with a factor. The reform plans of Finance Minister Christian Lindner outline this.

What does the proposed reform aim to achieve?

The aim is to distribute the income tax burden more fairly between spouses and partners. The government wants to ensure equal optical fairness between men and women, as the wife, who often works part-time, bears a higher tax burden through tax class V. The advantage for employed women, especially part-time workers, would be that they would have more net income from their salary. This would increase the incentive to accept a full-time position, as the net salary per month would increase accordingly.

What would change?

If the traffic light government abolishes tax classes III and V, each spouse would have to pay the income tax contribution they earn. Married couples currently profit from tax splitting when one partner contributes a significant larger portion to the total income. In reality, they can save taxes compared to unmarried couples in this way.

The advantage or disadvantage so far is that married couples usually only file a joint tax declaration and only one taxable income is determined. This effect is sometimes negated, and a supplementary payment may be required.

Is marriage tax splitting to be abolished?

No. The tax advantage would remain.

What would change in actual tax burden?

In terms of actual tax burden for a couple, nothing changes if the traffic light government's plans are implemented. Regardless of which tax class appears on the salary slip, the tax is calculated based on the tax declaration. The planned reform is mainly of a cosmetic nature for most people.

And regarding the net monthly income before the tax declaration?

According to the Taxpayers' Association, which calculated the issue for the "Bild" newspaper, a couple earning approximately 3000 and 1000 Euro gross would be affected as follows: The higher earner would have approximately 259 Euro less net per month, while the other would have 95 Euro more. If one earns 4000 and the other 1500 Euro, the one with the higher income would initially have a minus of 318 Euro, and the other would have a plus of 134 Euro. Once again, the main earner would be reimbursed their "losses" through the tax declaration.

What problems could result from the reform?

Who needs to file a tax declaration?

All employees who perform at least two different jobs and belong to tax class 6
Married couples, who have tax class 3 or 5
All those who earn more than 410 Euro in addition to their main income; this could be income from renting or leasing, or pensions
Those who have been granted a tax-free allowance by the tax office
Self-employed persons, entrepreneurs and farmers must generally file a tax declaration if their income exceeds the tax-free allowance of 10,347 Euro (2022)
Those who were employed on short-term work contracts in the previous year
Those who receive employment-related benefits such as unemployment, parental, sickness or maternity benefits
Married couples who divorced in 2022 but were jointly taxed beforehand, as well as divorced or separated married couples where one party is liable to pay alimony
In some cases, a tax declaration may be required due to capital gains. This is the case if church tax on capital income has not been paid, foreign income is involved for which no tax was withheld at source, or too little tax was paid on taxable income in the previous year
Pensioners, if their income exceeds the tax-free allowance of 10,347 Euro (Singles)

Who does not need to file a tax declaration?

Persons who have no income or whose income only results from employment without any additional income.

How will it be implemented?

If the Federal Government has its way, it will be simple. As the Federal Government intends, "in the context of improved digital interaction between taxpayers and the tax administration, we will transfer the combination of tax classes III and V into the factor method of tax class IV, which will then be easily and bureaucratically applicable and creates more fairness." According to the intention statement.

What should affected individuals do now?

First and foremost, nothing. Unless, of course, you are a tax official. Then, work may come your way.

The proposed tax reform aims to achieve a more fair distribution of the income tax burden between spouses and partners, addressing the issue where the wife, often working part-time, bears a higher tax burden through tax class V.
According to Tax Tips and the government's plans, married couples currently benefitting from tax splitting with tax classes III and V will have their income tax contribution calculated individually if the reform is implemented.
Christian Lindner's reform plans outline the transfer of tax classes III and V into tax class IV with a factor, aiming to create more fairness and ease of application.
The Legal questions surrounding this reform may be addressed by consulting a financial advisor or the Tax Office, ensuring individuals understand the implications for their net monthly income before the tax declaration.
The TrafficCoalition's goal is to implement these plans by 2025, while advocating for consumers' interests in this tax reform process led by Finance Minister Christian Lindner.
Revenues generated through tax reforms could potentially benefit the entire family, incentivizing employed women to accept full-time positions and ensuring the fairness of the tax burden between spouses.