Cabinet - What changes through new tax classes and deductions
Taxpayers will benefit from higher tax deductions this year in income tax, in addition to new tax classes for married couples and civil partners starting in 2030. The German government has initiated these reforms in Berlin and will discuss them next in the Bundestag and Bundesrat.
These measures are expected to relieve taxpayers, particularly families, by an average of 14 billion Euros per year by 2028. Here's what changes for citizens regarding tax laws:
Tax Deductions
According to the Federal Constitutional Court, the minimum existence cannot be taxed. Therefore, tax deductions in income tax must be regularly adjusted. They will no longer only apply to future years but also retroactively for the current year 2024.
Specifically, the basic tax-free allowance, below which no income tax is payable, will increase by 180 Euro to 11,784 Euro in this year. It will be further increased by 300 Euro to 12,084 Euro in the next year, and by 252 Euro to 12,336 Euro in 2026.
The tax-exempt child allowance will be increased by 228 Euro to 6,612 Euro in this year. It will be further increased by 60 Euro to 6,672 Euro in 2025 and by 156 Euro to 6,828 Euro in 2026. However, these numbers are still preliminary and may be adjusted in the fall if new data on the minimum existence becomes available.
Child Benefit
Starting in January, families will receive five Euros more per month and child - a total of 255 Euros instead of the previous 250 Euros. In 2026, another adjustment is planned: then, families will receive an additional four Euros per month and child, totaling 259 Euros.
The child care supplement, which supports families with low incomes, will also be increased by five Euros per child per month, totaling 25 Euros per month per child. These reliefs for families were part of the difficult negotiations of the traffic light coalition for the 2025 budget.
Inflation Adjustment in Tax Rates
Lindner managed to pass through the budget negotiations that the key values in income tax be adjusted again to inflation. The income thresholds at 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 peak tax rate at 45%, will continue to apply to taxable annual income above 227,826 Euros. However, the thresholds for the solidarity surcharge will also be raised.
The federal government is thus eliminating 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
Tax classes do not directly affect the final amount of taxes payable. However, they allow couples to have more money available until the final tax declaration, effectively providing a zero-interest loan from the tax office. Couples with differing incomes have used the combination of tax classes 3 and 5 for this purpose so far. The higher-earning partner benefits from higher deductions in tax class 3, while the partner with the lower income has significantly higher deductions in tax class 5.
However, both together have the best possible net income available to them - they must, however, reckon with having to pay taxes at the end of the year. Additionally, for low-wage earners, there can be a quick impression that their work is not worth it.
The German government plans to abolish the two tax classes and instead, starting in 2030, partners will automatically fall into tax class 4 using the so-called factor method. The tax office will then calculate specifically how much each partner contributes to the net income and tax accordingly. The tax burden is intended to be distributed more fairly between both spouses or partners. Under the hood, the tax burden for couples does not change, but tax payments will be less frequent.
Does anything change about spousal splitting?
No. The spousal splitting is also applied in tax class four with the factor method. Partners can then file a joint tax declaration. Their incomes are then combined, and in the calculation of the tax burden, the tax office assumes that both contribute equally to the family income. This brings advantages if 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 that splitting rewards income differences and provides incentives for women to work part-time. This ultimately leads to lower pension claims and more poverty in old age for women. The FDP opposes the abolition, as it sees it as equivalent to a significant tax increase.
- The Traffic-Coalition, composed of several German political parties, played a significant role in negotiating these tax reforms, including the increase in child benefit and family reliefs.
- The Federal Assembly and Federal Council will also deliberate on these tax adjustments initiated by the German Cabinet, ensuring a comprehensive review of these proposals.
- The changes in tax deductions and classes aim to reduce the financial burden on taxpayers, particularly families, as inflation continues to impact everyone's finances in Germany.
- The Federal Constitutional Court ruled that the minimum existence cannot be taxed, consequently leading to the revision of tax-deductions in income tax for both the current and future years.
- Partners who fall into the tax class 4, starting in 2030, will have their contributions to the net income calculated specifically by the tax office, aimed at promoting a fair distribution of tax burden between both spouses or partners.
- The Berlin Cabinet expects that these reforms will negatively impact the Federal government's budget, as taxpayers will pay less income tax due to the increased deductions and tax-exempt amounts.
- Despite the rise in child benefit and other family reliefs, some argue that the spousal splitting in tax declarations should be abolished, accusing it of rewarding income differences and encouraging part-time work for women, ultimately leading to lower pension claims and poverty in old age.
