Taxable Income

"Taxable income" is a term used in tax law and refers to the amount of income to which the tax rate is applied in order to calculate income tax. It results from the income of a taxpayer after deduction of certain amounts and allowances.

Steps for determining taxable income

These are the steps that usually lead to the determination of taxable income:

1. Determining income: First, the income from the seven types of income is calculated. In doing so, the relevant income-related expenses or business expenses are deducted from the income of each type. This is how you get, for example, the taxable wages (income from employment less income-related expenses).
2. Total income: Then the income from all types of income is added together. This gives the total income.
3. Deduct relief amounts: Certain deductions and allowances are then subtracted from the total income, such as the age deduction (for taxpayers over 64 years of age) and the deduction for single parents. If income from agriculture and forestry remains after these deductions, the allowance for farmers may be added. After these steps, the total amount of income is obtained.
4. Loss deduction and other deductions: Losses from other years are deducted from the total income (loss carryback from the previous year or loss carryforward)​. Then special expenses (e.g. insurance contributions, donations) and extraordinary burdens (e.g. medical expenses, insofar as they exceed the reasonable personal burden) reduce the income. After these deductions, you get the taxable income if no child allowances are to be taken into account.
5. Take child allowances into account: If there are children, it is checked whether the child allowance for the parents is more favorable than the child benefit. If this is the case, the child allowance is deducted from the calculated income (if necessary together with a hardship compensation for small additional income)​. The result is the taxable income. (Otherwise – if the child benefit is more favorable – the previously determined taxable income remains, and the child benefit is granted instead.)
6. Application of the tax rate: The income tax rate is then applied to the taxable income. Either the basic rate (for single people) or the splitting rate (for spouses who are taxed jointly) applies. Due to the progressive rate, a higher taxable income results in a higher tax rate.

The taxable income is therefore the amount that remains after all the permitted deductions and allowances have been taken into account and to which the respective tax rate is applied to determine the amount of income tax. The tax rate is progressive, which means that the tax rate increases as the taxable income increases. [1]

Taxable income can be found in the annual income tax return submitted to the tax office. Once all relevant information has been entered in the tax return, the taxable income is determined by the tax office or by tax calculation programs.

The steps to find out your taxable income in Germany explained

In order to determine your taxable income, it is therefore necessary to fill out your tax return carefully and completely and to include all relevant receipts and supporting documents. Tax software or advice from a tax advisor can help you avoid mistakes and ensure that you take advantage of all tax benefits. Here are the steps to follow to find out:

1. Collecting documents
   First, you should collect all the relevant documents required for your income tax return. These include, among other things:
   • Income tax certificate(s) from employers
   • Proof of other income (e.g., from rentals, capital assets)
   • Proof of income-related expenses, special expenses, and extraordinary expenses
   • Proof of pension contributions paid
2. Filling out the tax return
   The tax return can be completed manually, using tax software, or by a tax advisor. Income from various sources is reported and the corresponding expenses (income-related expenses, special expenses, extraordinary expenses, etc.) are deducted.
3. Calculating taxable income
   Once all relevant information has been entered, taxable income is calculated as follows:
   • Total income from all sources
   • Deduction of income-related expenses, special expenses, and extraordinary expenses
   • Deduction of allowances (e.g., basic allowance, child allowance) = Taxable income
4. Use of tax calculation programs
   Many tax software programs and online tax calculators offer the option of estimating taxable income once all data has been entered. These programs use the information entered to calculate taxable income and provide an estimate of the expected tax burden.
5. Tax assessment notice
   After the tax return has been submitted to the tax office, the taxable income is officially determined and the taxpayer receives a tax assessment notice. This notice shows the taxable income and calculates the income tax based on it. [3]

Income from agriculture and forestry

This category refers to income from the cultivation of land for the production of plant or animal goods. A concrete example would be a farmer who runs his own farm where he grows grain and keeps cows for milk production. The income includes the sale of milk, grain and possibly subsidies received for agricultural activities.

Income from business operations

This income comes from self-employment in trade, crafts, industry or another commercial sector. Let's take the example of a self-employed craftsman who runs a carpentry business. His income is made up of the revenue from furniture produced and services rendered less operating expenses such as material costs, rent for the workshop and salaries for employees.

Income from self-employed work

This category refers to the self-employed provision of services that require higher education or are of an artistic or literary nature. An example of this would be a freelance architect who designs buildings. His income comes from the fees for his planning services, after deduction of professional expenses such as office rent, software licenses and travel expenses.

Income from letting and leasing

This refers to income from the transfer of real estate or movable property for use. An example would be an owner who rents out several apartments. The rental income, after deduction of income-related expenses such as maintenance costs, interest on loans to finance the property and depreciation, constitutes his income.

Income from employment

This is income from an employment relationship where the employer pays income tax directly. An example is a teacher at a public school whose salary is paid monthly, less income tax and social security contributions.

Income from capital assets

This includes income from interest, dividends and other capital gains. For example, a person owns shares in a company that pays an annual dividend. This dividend income, less capital gains tax and any income-related expenses, constitutes income from capital assets.

Other income within the meaning of Section 22 EStG

This category is a catch-all for income that cannot be assigned to the other six types. An example of this is income from private sales transactions, such as the profit from the sale of shares that have been held for more than one year. The difference between the sale price and the purchase price, less the selling costs, constitutes the income from this category.

Each of these types of income is treated according to specific legal provisions and contributes to the determination of total income, which ultimately forms the basis for the calculation of taxable income and thus income tax.

1. Determination of income from various sources
First, the income from all seven types of income is compiled: agriculture and forestry, business, self-employment, employment (e.g. salary), capital assets, renting and leasing and other income (e.g. pensions, maintenance payments). However, it is rare for income to come from all seven sources. Usually only a few sources occur at the same time.

2. Deduction of income-related expenses
Income-related expenses can be deducted from income. Income-related expenses are expenses that serve to acquire, secure and maintain income. These include, for example, travel costs to work, training costs or expenses for work equipment.

3. Total amount of income
After deducting the income-related expenses from the income from the various sources, the total amount of income is obtained.

4. Deduction of special expenses and extraordinary expenses
Special expenses and extraordinary expenses can be deducted from the total amount of income. Special expenses include contributions to health and long-term care insurance, pension contributions, donations and church tax. Extraordinary expenses are major expenses that a taxpayer inevitably incurs and that exceed the normal standard of living, such as high medical costs.

5. Deduction of allowances
In addition, allowances such as the basic allowance, child allowances or the age relief amount can be deducted to reduce the tax burden.

6. Taxable income
After deducting all allowable amounts from the total amount of income, the taxable income is obtained. The tax rate is applied to this income to calculate the income tax.

Let's assume a person has a gross income from employment of 50,000 euros, income-related expenses of 1,000 euros, special expenses of 2,000 euros and is entitled to the basic tax-free allowance (in 2023: 10,347 euros for single people in Germany).

• Gross income: 50,000 euros
• Income-related expenses: -1,000 euros
• Total amount of income: 49,000 euros
• Special expenses: -2,000 euros
• Taxable income before allowances: 47,000 euros
• Basic tax-free allowance: -10,347 euros
• Taxable income: 36,653 euros

The corresponding tax rate is applied to the taxable income of EUR 36,653 to calculate the income tax liability.

This calculation is highly simplified and may vary depending on your individual situation. Tax regulations can be complex and there are many specific provisions that need to be taken into account. Therefore, it can be helpful to seek professional tax advice or use specialized tax software.

What tax-free amounts are there?

These are some of the most important tax-free amounts in Germany:

1. Basic tax-free allowance

• Purpose: Ensures that the minimum subsistence level of every taxpayer remains tax-free.
• Amount 2025: 12,096 euros for single people and 24,192 euros for married couples assessed jointly. (In 2026, it will rise further to €12,348).

2. Child allowance

• Purpose: Serves to exempt a child's minimum subsistence level from tax. It is granted as an alternative or in addition to child benefit, depending on which is more favorable for the taxpayer.
• Amount 2025: 9,600 euros per child (consisting of an allowance for the material subsistence minimum of €3,336 and an allowance for care, education or training needs of €1,464 per parent). In 2026, the amount will increase to €9,756.

3. Single parent relief amount

• Purpose: Supports single parent taxpayers.
• Amount 2025: 4,260 euros, can be increased by 240 euros for each additional child under certain conditions.

4. Employee lump sum

• Purpose: Flat-rate deduction for income-related expenses for income from employment if no higher income-related expenses are proven.
• Amount: 1,200 euros.

5. Saver's lump sum

• Purpose: Tax free amount for income from capital assets.
• Amount: 801 euros for single persons and 1,602 euros for married couples subject to joint taxation.

6. Relief amount for single parents

• Purpose: Additional tax-free amount for single parents to reduce the tax burden.
• Amount: As stated above under single parent relief amount.

These tax free amounts are automatically taken into account in the income tax return, provided that the requirements are met and the corresponding information is provided. They reduce the taxable income and thus the tax burden. It is important to check the current tax free amounts and requirements regularly, as legal regulations can change.

Income tax in Germany is calculated using a progressive tax scale, which means that the tax rate increases as income rises. There are different tax brackets and rates that apply depending on the amount of taxable income and personal situation (e.g. single, married). As of 2023, here are the main features of the German income tax scale:

Basic tax rates and ranges

• Basic tax-free allowance: No income tax is payable up to an income of EUR 10,908 (for single people) or EUR 21,816 (for married couples who are jointly assessed). This amount is tax-free.
• Initial tax rate: Income above the basic tax-free allowance up to an amount of EUR 15,895 is taxed at a rate of 14%. The initial tax rate then increases progressively.
• Progression zone: Between EUR 15,895 and EUR 62,572 for single people (twice as high for married couples), the tax rate increases progressively from 14% to 42%. This range shows the progressive nature of the tax system, where the tax rate increases with income.
• Top tax rate: Income above EUR 62,572 and up to EUR 277,825 is taxed at 42%.
• Wealth tax: A tax rate of 45% applies to taxable income above 277,825 euros (for single people, twice as high for married couples).

Special aspects

• Solidarity surcharge: An additional solidarity surcharge of 5.5% may be levied on income tax, depending on the level of income.
• Church tax: Members of certain churches may have to pay church tax in addition to income tax, the amount of which is between 8% and 9% of income tax, depending on the federal state.

Additional information

These figures are general guidelines. The actual tax burden may vary depending on individual circumstances (e.g. special expenses, extraordinary expenses, tax-free amounts, taxable income). There are also different tax brackets for different life situations, which can influence the amount of tax prepayments. For an exact calculation of the tax burden on taxable income or for specific questions, it is advisable to consult a tax advisor or use an up-to-date tax calculation program.