How are income taxes calculated in Germany?

Income taxes in Germany are calculated based on a progressive tax system, where the tax rate increases as income rises. The process involves several key components and steps:

Determine Taxable Income: This is the first step and involves subtracting allowable deductions (such as social security contributions, professional expenses, and special expenses) from your gross income. Taxable income includes earnings from employment, self-employment, investments, rental income, and other sources.
Progressive Tax Rates: As of my last update in April 2023, the income tax rates in Germany range from 0% to 45%. The tax rate starts at 0% for income below a basic tax-free allowance (Grundfreibetrag), which is set at €10,347 for single filers and €20,694 for married couples filing jointly for the year 2022. The rate then increases progressively through various income brackets up to a top rate of 45% for very high incomes (known as the "Reichensteuer" or wealth tax, applicable to income above a certain threshold, which was approximately €277,826 for single filers in 2022).
Solidarity Surcharge: On top of the income tax, a solidarity surcharge (Solidaritätszuschlag) of 5.5% of the income tax is levied to support the costs of German reunification. However, this surcharge now applies only to higher-income earners.
Church Tax: Members of certain religious congregations may also pay a church tax (Kirchensteuer), which ranges from 8% to 9% of the income tax, depending on the federal state.
Tax Classes (Steuerklassen): Germany has a system of tax classes (Steuerklassen) that affect the amount of wage tax (Lohnsteuer) withheld from salaries. There are six tax classes, and they can influence the amount of tax you pay throughout the year, especially for married couples and single parents.
Splitting Procedure for Married Couples: Married couples have the option to file taxes jointly, which can result in a lower combined tax burden due to the splitting procedure (Ehegattensplitting), where the combined income is divided by two, taxed according to the individual rates, and then the resulting tax is doubled.
Tax Declaration (Steuererklärung): After the end of the tax year, individuals can file a tax declaration to the tax office (Finanzamt) to adjust their tax payments. This process allows taxpayers to claim deductions for expenses not previously considered and potentially receive a tax refund.

The exact calculation of income tax in Germany can be complex due to the various deductions, allowances, and individual circumstances. Many residents use tax software or consult with tax professionals to accurately determine their tax liability and take full advantage of possible deductions.

Horizons provides all employees in Germany with an annual tax statement (Lohnsteuerbescheinigung) with the February pay slips. The annual tax statement outlines tht toal income earned and the taxes withheld throughout the year and supports the process of filing a tax return statement. 

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