Tax classes are dropping - what do the new rules bring?
Finance Minister Lindner presents the second annual tax law to the cabinet. The package must still be passed through the Bundestag. However, several tax reliefs and a tax class reform are in the works. This could particularly interest married couples and civil partners. The changes are part of the second annual tax law of Finance Minister Christian Lindner - a bundle of tax reforms that, according to the cabinet decision, should be passed through the Bundestag as a whole. Four changes are particularly relevant for citizens.
Tax allowances
According to the Federal Constitutional Court, the minimum existence cannot be taxed. Therefore, tax allowances in income tax must be regularly adjusted. They will not only change for future years but also retroactively for the current year 2024. Specifically, the basic tax-free allowance, up to which no income tax is due, will increase in this year by 180 Euro to 11,784. In the coming year, it is planned to raise it further by another 300 Euro to 12,084 Euro, and in 2026 by another 252 Euro to 12,336 Euro.
The tax-exempt child allowance will increase in this year by 228 Euro to 6,612 Euro. In 2025, it will increase further by another 60 Euro to 6,672 Euro, and in 2026 by another 156 Euro to 6,828 Euro. The numbers are still preliminary and can be adjusted with the Progression Report in the fall.
Child benefit
From January, families will receive five Euros more child benefit per month and child - so 255 Euro instead of the previous 250 Euro monthly.
Inflation adjustment in the tax brackets
Lindner managed to pass through the budget negotiations that the tax brackets be adjusted again to inflation. The income thresholds, from which the next higher tax rate applies, will be raised - with the exception of the top tax rate. This tax rate, which is still above the top tax rate with 45%, should continue to apply to taxable annual income of 227,826 Euro and over. The tax-free thresholds for the solidarity surcharge, however, will also be raised. With this adjustment, the federal government eliminates the so-called cold progression. Without this adjustment, a wage increase in line with inflation would lead to higher taxes - although the affected person would not actually have any higher purchasing power.
Tax classes for couples
The tax classes do not influence the final height of the payable taxes - but they allow couples to have more money at their disposal until the final tax declaration, a kind of interest-free loan from the tax office. Previously, couples with different high incomes used the combination of tax classes 3 and 5 for this purpose. The higher earner benefits from higher tax-free allowances in tax class 3, while the partner with the lower income has significantly higher deductions in tax class 5.
Does anything change about spouse splitting?
No. The Factor Method in Tax Class 4 will also apply the spouse splitting. Partners can then file a joint tax declaration. Their incomes will be combined, and in the calculation of the tax burden, the tax office assumes that both contribute equally to the family income. This brings advantages when the partners earn different amounts - the smaller income reduces the tax burden of the larger one. The future of splitting is controversial in the traffic light coalition: Family Minister Lisa Paus from the Greens would like to abolish it. She argues that splitting rewards income differences and gives incentives for women to work part-time. This ultimately leads to lower pension claim amounts and more poverty in old age for women. The FDP is against abolition, as it would result in a significant tax increase for them.
Tax policy discussions
During the ongoing discussions in politics, there's a push for broader tax reform, with Christian Lindner advocating for significant changes.
Proposed tax reforms
As part of the proposed tax reforms, Finance Minister Lindner has suggested potential modifications to the child benefit system, which could be a point of interest for the public.
