Federal Government - What changes through new tax classes and deductions
The Federal Government will introduce several reliefs in income tax and tax class reforms on Wednesday. This could particularly interest married couples and civil partners. These changes are part of the second annual tax law of Finance Minister Christian Lindner (FDP), which is supposed to be passed through the cabinet and then through the Bundestag as a package.
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 need to be regularly adjusted. They will no longer only apply for future years but also retroactively for the current year 2024.
Concretely, the basic tax-free allowance, up to which no income tax is due, will increase by 180 Euro to 11,784 in this year. It is planned to increase it by an additional 300 Euro to 12,084 Euro in the following year, and by 252 Euro to 12,336 Euro in 2026.
The tax-exempt child allowance will increase by 228 Euro to 6,612 Euro in this year. It is planned to increase it by an additional 60 Euro to 6,672 Euro in 2025 and by 156 Euro to 6,828 Euro in 2026. The numbers are still preliminary and may 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 have the tax brackets adjusted again to inflation in the budget negotiations. The income thresholds, above 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 at 45%, will continue to apply to taxable annual income above 227,826 Euro. 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 affect the final amount of taxes payable - but they allow couples to have more money available until the final tax declaration, a kind of interest-free loan from the tax office. Couples with different incomes have used the combination of tax classes 3 and 5 for this purpose so far. The higher earner profits from higher tax-free allowances in tax class 3, while the partner with the lower income has significantly higher deductions in tax class 5.
Together, they have the best possible net income available to them - but they must reckon with having to pay taxes at the end of the year. In addition, the impression can quickly arise for low-wage earners that their work does not pay off.
The Federal Government wants to abolish these two tax classes. Instead, partners should fall under tax class 4 automatically from 2030 using the factor method. The tax office then calculates exactly how much each partner contributes to the net income and taxes accordingly. The tax burden for the couples thus remains the same, but fewer adjustments will be needed.
Does anything change in spousal splitting?
No. Even in the Factor Method of Tax Class Four, the spouse splitting is applied. Partners can then file a joint tax declaration. Their incomes are then combined, and when calculating the tax liability, 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 (Greens) would like to abolish it. She argues: Splitting rewards income differences and gives incentives for women to work part-time. This ultimately leads to lower pension claims and more poverty in old age for women. The FDP is against abolition, as it would mean a significant tax increase for them.
- Christian Lindner, the Finance Minister from the FDP party, is responsible for introducing income tax and tax class reforms as part of the second annual tax law.
- Married couples and civil partners might be interested in the proposed changes to tax allowances, as the minimum existence cannot be taxed, according to the Federal Constitutional Court.
- In Germany, the basic tax-free allowance will increase by 180 Euro to 11,784 in 2024, and further increases are planned for the following years, aiding citizens with lower incomes.
- The tax-exempt child allowance in Germany will also increase, reaching 6,828 Euro by 2026, benefiting families with children.
- Inflation adjustment in tax brackets will eliminate the "cold progression" issue in Germany, preventing wage increases from causing higher taxes, despite no increase in purchasing power.
- The Federal Government aims to abolish the tax classes 3 and 5 for couples from 2030, replacing them with the Factor Method in tax class 4, which will automatically assign partners according to their contributions to the net income.
- The controversy over spousal splitting in the Traffic Light Coalition persists, with Family Minister Lisa Paus (Greens) advocating for its abolition, while the FDP opposes it due to the potential significant tax increase for their members.
