How Is My Taxable Income Calculated?
Most deductions from your monthly income will be made up of taxes.
Each day, there are thousands of Google searches from people who are looking for a gross-net calculation (Brutto-Netto-Rechner) which will reveal precisely how much they will have remaining at the end of the month after social security contributions and tax contributions have been deducted from their overall income. Unfortunately, people are often misled by the information that they receive.
Most deductions from your monthly income will be made up of taxes. After all, it’s fair to say that income tax (Einkommesteuer) rates at the present time are quite high. However, income taxes won’t be applied to all of your income. The Income Tax Act’s (Einkommensteuergesetz) second paragraph outlines which types of income are subject to taxation. The income types which aren’t listed under this law will therefore not have income tax applied.
One example of a type of income on which income tax is not applied would be a lottery win. This makes it difficult to determine the exact amount of income you’ll receive when several taxation exceptions exist. Here, we take a closer look at the types of income which are taxable.
Which Income Types Are Subject To Income Tax (Einkommensteuer)?
Anyone who is domiciled or who is habitually resident in Germany will be subject to income tax and therefore subject to taxation. Under the German Income Tax Law (Einkommensteuergesetz) there are seven distinct income types which have been outlined.
Income tax (Einkommensteuer) under German law is applied to the following seven categories of income:
- Business income
- Income receives from forestry or agriculture (Land- und Forstwirtschaft)
- Income received from self-employment
- Income received from leasing or renting
- Income received from capital (Kapitalvermögen)
- Income received from non-self employment
- Other income
How Is Total Income Calculated?
Generally speaking, the term “taxable income” (steuerpflichtiges Einkommen) is used to refer to all income after expenses have been deducted. In actual terms, income is gross inflow. For this purpose, the term “expenses” is used to refer to business expenses (Betriebsausgaben) or advertising costs (Werbungskosten). These can be deducted from the total amount of income received. The remainder is the total revenue net amount.
Bear in mind that from a taxation point of view, only the expenses and revenues which have been incurred over the course of a single calendar year are considered to be relevant. The inflow or discharge principle (Abflussprinzip/Zuflussprinzip) takes effect.
How Is Taxable Income Determined?
The amount of taxable income you receive will be individually calculated by the Tax Office (Finanzamt). It will be less than the amount of annual gross income that you receive. When working out the final calculation, there are a number of deductions which will be subtracted from the total amount of gross income that you received over the course of the tax year.
These deductions include
- Special expenses (Sonderausgaben)
- Individual allowances (Freibeträge)
- Extraordinary charges (außergewöhnliche Belastungen)
- Precautionary expenses (Vorsorgeaufwendungen)
All of these expenses are deducted from the total amount of gross income that you received, whether that income be from self-employed work, rental income or non-self employed work. It’s also important to bear in mind that any retirement benefits or child allowance benefits may affect the total amount of taxable income which you receive.
Note: The amount of income tax (Einkommensteuer) which you will actually have to pay on your total income will only be finally revealed once the tax year has come to an end as this is the point at which all of your gross income and all of your tax-reducing expenditures will be known in full.