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Taxable Income

Taxable income is a central concept that forms the basis for calculating income tax. It comprises the income of an individual or company after deduction of all allowable expenses, allowances and lump sums. This value is decisive for determining the tax burden and reflects financial performance. Understanding and correctly applying this concept is essential for effective tax planning and optimization in the context of business administration.

What does taxable income mean?

"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.

Reasons why only the taxable income is taxed

The purpose of taxing taxable income is to distribute the tax burden according to individual financial ability while supporting political, social and economic goals. Here are some reasons why only taxable income is taxed:

Consideration of personal situation By deducting certain expenses and personal circumstances (such as special expenses, extraordinary expenses, allowances for children) from gross income, the tax assessment basis is adjusted to the individual's ability to pay. In this way, social and economic differences between taxpayers are taken into account.
Progressive tax system By determining the taxable income, the progressive tax system can be applied, which imposes a higher tax rate on higher incomes. This promotes social justice by ensuring that the tax burden is distributed according to economic performance.
Promoting certain policies The ability to deduct certain expenses from gross income can be used to promote certain economic or social goals. For example, tax relief for investments in sustainable technologies or for old-age provision can help to steer investments into these areas.
Avoidance of double taxation Specific deductions and allowances can prevent income from being taxed more than once. This applies, for example, to income that has already been taxed in another country or for which capital gains tax has already been paid.
Simplicity and administrative burden Although the income tax calculation system may seem complex, it aims to ensure fair and efficient taxation. The determination on taxable income allows for a standardized calculation method that takes into account a wide range of personal circumstances.

How do you find out your taxable income?

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

Overview of the steps to find out the taxable income in Germany

The following diagram shows an overview of the steps to find out the taxable income in Germany.

The steps to find out the taxable income in Germany explained

In order to determine the taxable income, it is therefore necessary to complete the tax return carefully and in full, taking into account all relevant receipts and evidence. Tax software or advice from a tax advisor can help to avoid mistakes and ensure that all tax benefits are used. Here are the steps on how to find out:

  1. Collecting the documents
    First, all relevant documents required for the income tax return should be collected. These include, among other things:
    • Wage tax certificate(s) from employers
    • Proof of other income (e.g. from renting, capital assets)
    • Proof of income-related expenses, special expenses and extraordinary expenses
    • Proof of pension expenses paid
  2. Completing the tax return
    The tax return can be completed manually, with the help of tax software or by a tax consultant. This involves declaring income from various sources and deducting the corresponding expenses (income-related expenses, special expenses, extraordinary expenses, etc.).
  3. Calculation of taxable income
    Once all the relevant information has been entered, the 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. Using tax calculation programs
    Many tax software programs and online tax calculators offer the option of estimating taxable income once all the data has been entered. These programs calculate the taxable income based on the information entered and provide an estimate of the expected tax burden.
  5. Tax assessment notice
    Once 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 states the taxable income and calculates the income tax based on it.

The 7 types of income explained with examples

In Germany, income is divided into seven types of income for tax purposes. This classification is relevant for calculating taxable income and thus for determining income tax. The seven types of income are explained here with examples:

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.

Which types of income need to be
taken into account? - An overview

Income from agriculture and forestry This includes income from the cultivation of land used for the cultivation of plants or animal husbandry, as well as from the use of natural resources. This also includes income from forestry and viticulture.
Income from business operations This includes income from any self-employed, sustainable activity with the intention of making a profit that constitutes participation in general economic transactions. This also includes commercial sole proprietorships and shares in partnerships.
Income from self-employment This category includes income from freelance work, such as that earned by doctors, lawyers, engineers, architects, journalists or artists. A distinction is made here between freelance work and other self-employed work.
Income from employment This includes salaries, wages, bonuses, royalties and other emoluments and benefits paid for dependent employment. Pensions and annuities from previous employment also fall into this category.
Income from capital assets This includes interest from savings investments, dividends from shareholdings, income from investment funds and similar investment income. Since 2009, this income has been subject to withholding tax in Germany.
Income from renting and leasing This type of income refers to income from renting and leasing real estate, land or other tangible assets.
Other income Other income includes, for example, pensions, income from maintenance payments, speculative gains (from private sales transactions that fall outside the speculation period) and certain benefits such as severance payments for the loss of employment.

Each of these types of income is subject to specific tax regulations that must be taken into account when determining taxable income. Depending on the type of income, different allowances, lump sums and income-related expenses may be relevant. The total income from these seven types of income forms the basis for calculating taxable income.

How is taxable income calculated?

The calculation of taxable income in Germany is done in several steps and takes into account different types of income, expenses, deductions and allowances. Here is a simplified illustration of the calculation process:

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.

Calculation example

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 are tax-free amounts?

Tax-free amounts are amounts that are deducted from taxable income before income tax is calculated. They are used to take into account the tax-free basic needs of a taxpayer or certain personal circumstances. There are different types of tax-free amounts that can be applied to taxable income depending on the taxpayer's individual situation. The amount and applicability of these tax-free amounts can change over the years, depending on legal adjustments.

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.

Revenue, Income or Earnings:

What is the difference in particular in relation to taxable income?

These distinctions are important to understand how taxable income is determined step by step in Germany, starting with raw income and ending with taxable income, which is ultimately used to calculate income tax. Here, therefore, is a table that clarifies the differences between receipts, income, earnings and taxable income, particularly in terms of their role in calculating taxable income:

Term Definition Reference to taxable income
Revenue Gross income from one or more of the seven types of income, before deduction of income-related expenses or operating expenses. First step in calculating taxable income.
Income The result after deducting income-related expenses or operating expenses from the income. For some types of income, it may also be after deduction of tax-free amounts or lump sums. Intermediate step; income forms the basis for calculating income.
Earnings Total income from all sources after deduction of special expenses, extraordinary expenses, other deductions and tax-free amounts. Penultimate step; direct preliminary stage of taxable income.
Taxable income The income after further deductions (e.g. age relief amount, relief amount for single parents), which serves as the basis for calculating income tax. Final basis for calculating income tax.

How high is the income tax in Germany?

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.

Key questions on the topic of taxable income answered briefly

What is taxable income below the basic tax-free allowance?

Taxable income below the basic tax-free allowance is the amount of income below the tax-free threshold up to which no income tax is levied. In Germany, the basic tax-free allowance is the amount of income up to which there is no tax liability in order to make the minimum subsistence level tax-free. If a person's taxable income is below this amount, they do not have to pay income tax. The basic tax-free allowance therefore serves to protect the taxable minimum subsistence level.

Is parental allowance taxable income?

Parental allowance is not considered taxable income in Germany as it is tax-free. However, it is subject to the progression proviso, which means that it is taken into account when determining the tax rate applied to other taxable income. This can lead to an increase in the tax rate on other income and thus indirectly increase the tax burden, even though the parental allowance itself is not taxed.

Where can I find my relevant taxable income?

You will find your relevant taxable income in the income tax assessment notice issued by the tax office after your tax return has been submitted and checked. The tax assessment notice contains detailed information about the calculation of your tax liability, including the taxable income on which the tax was calculated.

How can I reduce my taxable income?

To reduce your taxable income, you can claim income-related expenses, special expenses, extraordinary expenses and tax free amounts such as the employee lump sum, pension expenses and donations. You can also deduct depreciation for items used for professional purposes and costs for professional training. Claiming child allowances and using tax-privileged pension products are further ways to reduce your tax burden.

Gross or net taxable income?

Taxable income refers to the amount that remains from gross income after deducting all permitted expenses, tax-free amounts and lump sums and to which income tax is applied. It is therefore neither directly the gross income nor the net income in the everyday sense (net income is often understood as the income after deduction of taxes and social security contributions).

Here is a brief explanation:

  • Gross income: This is the total amount of income without any deductions. It includes income from work, capital gains, renting and leasing, company profits, etc.
  • Net income: Net income is the income that remains after taxes and social security contributions have been deducted from gross income. It is the amount that people actually have at their disposal.
  • Taxable income: Taxable income is determined by making specific deductions from gross income. These include income-related expenses, special expenses, extraordinary expenses, tax-free amounts for children, etc. Only after these deductions have been made from the total amount of income is the taxable income obtained. The income tax rate is then applied to this income to calculate the tax liability.

The taxable income is therefore a calculated figure that forms the basis for determining the income tax liability. It is the result of a calculation process that aims to fairly capture the taxpayer's taxable capacity.

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