2023 Tax Changes: An Overview
Numerous tax changes will come into force as of January 1st, 2023. These stem from a few sources namely the government’s third relief package, the Inflation Adjustment Act (Inflationsausgleichsgesetz), and last but not least, the 2022 Annual Tax Act (Jahressteuergesetz 2022), which was approved by the Bundesrat (Federal Council) on December 16th, 2022. Learn more here about the various tax relief measures that are being implemented and what they mean for your 2023 tax return.
Tax Changes as of January 2023
In this article, we’ll give you an overview of the most important tax changes coming in 2023 in alphabetical order.
Basic retirement supplements will be tax-free
Since January 2021, a supplement known as “basic retirement” (Grundrente) has been granted to retirees with low pensions. This supplement will be made tax-free retroactively to the point of its introduction as a result of the 2022 Annual Tax Act.
“Bürgergeld” to replace unemployment benefits II (Hartz IV)
As of January 1st, 2023, the new “Citizen’s Benefits” (Bürgergeld) will replace unemployment benefits II (ALG 2/Hartz IV) and income support (Sozialgeld). The standard rate for single adults will increase by 52 euros to 502 euros per month. In the future, the requirements to receive such benefits will be adjusted to inflation rates looking forward instead of retroactively. During the waiting period of 12 months, assets of up to 40,000 euros will not be taken into account and accommodation costs will be covered in full while an appropriate level of heating costs will also be covered.
Child benefits, Child benefits supplement, and child allowance
As of January 2023, child benefits (Kindergeld) are being increased to 250 euros per child per month and are applied uniformly for each child. The increase initially only applies to 2023 and 2024, as a new form of basic child benefits (Kindergrundsicherung) are to be introduced in 2025.
The maximum child supplement (Kinderzuschlag) is also being increased to 250 euros per month per child. The child supplement is paid on application to families who are entitled to child benefits and have low incomes. The immediate supplement (Sofortzuschlag), which has been paid to children affected by poverty since July 2022, is already included in the new maximum amount.
The 2022 child allowance (Kinderfreibetrag) will be increased retroactively to January 1st, 2022 by 160 euros for a total of 8,548 euros (previously 8,388 euros). This will affect 2022 tax returns. From 2023 onwards, a new child allowance totaling 8,952 euros per child will apply. This includes the base child allowance as well as the allowance for childcare and education (Freibetrag für den Betreuungs-, Erziehungs- und Ausbildungsbedarf).
Education allowance increase
If your child entitled to child benefits/allowance is pursuing an education and living away from home, an education allowance (Ausbildungsfreibetrag) can be claimed for them. In 2023, this allowance is increasing from 924 to 1,200 euros per calendar year. The allowance is granted pro rata each month and serves to reduce parents’ taxable income. The allowance is halved for married parents who file individual tax returns.
Food service industry
A reduced sales tax rate of 7 percent will continue to apply to food (excluding beverages) in the restaurant industry.
Gas/Heating price relief
The one-off relief for gas and heating (Dezemberhilfe) counts towards additional income and will be subject to tax for private consumers. With this being said, a phase-in and mitigation zone applies, so the relief only has to be taxed from income of 62,603 euros (2022) subject to solidarity surcharges.
Home office lump sum and home offices
The home office lump sum (Homeoffice-Pauschale), previously applying only to 2020 to 2021, now applies indefinitely as of January 2023. The lump sum was also increased: 6 euros per day spent working from home can now be claimed (previously 5 euros) and a total of 210 days per year (previously 120 days). A maximum of 1,260 euros per year can be claimed with the home office lump sum (previously 600 euros).
Regulations on home offices (häusliches Arbeitszimmer) have also been revised. Up until now you could deduct up to 1,250 euros per year for your home office provided that no other professional workspace was made available to you (limited deduction). To avoid unequal tax treatment from the home office lump sum, you are also able to claim the home office lump sum as of 2023 – even if you worked away from home or at your primary workplace on the same day. For example, a teacher can claim the home office lump sum on a day that they both went to work at school and corrected exams in their home office. The maximum amount of 1,260 euros per year also applies here.
If your home office is the core of your business and professional activity, you can continue to deduct the expenses in full or a flat rate of 1,260 euros per year.
To sum it up: You can take advantage of the home office lump sum regardless of whether you work in your home office or at your kitchen table and whether the home office is the core of your professional activity or another workspace already exists.
Housing benefits reform
The housing benefits (Wohngeld) reform will introduce “Housing benefits +” (Wohngeld Plus) from January 2023 onwards. Entitlement to the benefits will greatly increase from 600,000 residents to around 2 million. The amount of housing benefits will also double from an average of 180 euros to 370 euros.
Income-related expenses lump sum increased
In 2022, the income-related expenses lump sum was increased from 1,000 euros/year to 1,200 euros/year as part of the German government’s first relief package. This was the first increase this lump sum has seen in a decade. In 2023, it will be increased once again by 30 euros. As of 2023, the total income-related expenses lump sum (Werbungskostenpauschale/Arbeitnehmer-Pauschbetrag) amounts to 1,230 euros per year.
Income tax rate adjusted
To help reduce the so-called cold progression (additional tax burden due to the rate of price increases), the basic tax-free allowance (Grundfreibetrag) will be increased and tax rate thresholds will be shifted to the right. As of 2023, the top tax rate of 42 percent will be applied to annual incomes of 62,810 euros (2022: 58,597 euros). The basic tax-free allowance is being increased from 10,347 euros (2022) to 10,908 euros (2023). Only the income earned above this amount must be taxed.
Income from the operation of photovoltaic systems on single-family homes or commercial properties will be tax-exempt for a total output of up to 30 kW and applies retroactively to January 2022. This applies regardless of whether the generated electricity is consumed by the owner or not.
The tax exemption for multi-family dwellings and mixed-use buildings applies to a total output of up to 15 kW per residential and commercial unit. If there are multiple installations, the revenue remains tax-exempt up to a maximum total output of 100 kW.
Relief for single parents increased
The relief for single parents will be raised by 252 euros as of January 2023 and amount to 4,260 per year (previously 4,008 euros). Single parents will receive another 240 euros for each additional child.
Retirement contributions fully deductible as of 2023
The tax-deductible portion of retirement contributions has increased by 2 percent each year and should have reached 100% from 2025 onwards. The German government’s joint plan from the coalition agreement is instead implementing this in 2023. As of 2023, all of your retirement contributions can now be claimed as special expenses (Sonderausgaben).
Savers’ Allowance to be increased
The coalition agreement has also led to an increase in the Savers’ Allowance (Sparer-Pauschbetrag). From January 2023, the allowance will be increased from 801 euros/year to 1,000 euros per year. Married couples filing a joint tax return can double the exemption amount to 2,000 euros (previously 1,602 euros). If you’ve already issued an exemption order, it’ll be automatically adjusted to the new limit and increased by 25%.
Tax IDs as payout methods
In 2022, the German government responded to the massive increase in energy costs by implementing numerous relief measures such as the energy lump sum (Energiepauschale). In the future, it will be possible to use Tax IDs for direct disbursement to help distribute certain public emergency aid and benefits, such as the planned climate funds (Klimageld), more accurately.
Tax Return Deadlines
When tax returns are mandatory
Tax returns are always submitted for the previous tax year, so those required to file a tax return have until July 31st of the following year. If the deadline falls on a Saturday, Sunday, or holiday, it is automatically extended to the following work day.
Due to complications brought on by the Corona pandemic, the filing deadline for 2020 and 2021 were extended by three months each. 2020 tax returns were due on October 31st, 2021, and 2021 tax returns were due on October 31st, 2022 for those required to submit.
The fourth Corona Tax Relief Act also extended the deadline for future tax years: Those required to file a 2022 tax return have until September 30th, 2023 to submit it to their local tax office. Since this deadline falls on a Saturday, it’s automatically extended to October 2nd, 2023.
Those required to file a 2023 tax return have until August 30th, 2024.
When tax returns are voluntary
Voluntary tax returns can be filed up to four years after a given tax year. The deadline for this is always December 31st without extensions. For example, you can file a voluntary 2019 tax return until December 31st, 2023.
Find out in this article why voluntary tax returns are always worthwhile.
Who is required to file a tax return?
If you belong to tax classes 3, 5, 6, or 4 with factorization, you’re required to file a tax return.
Anyone who received more than 410 euros in wage replacement benefits (Lohnersatzleistungen) is also required to file a tax return. These include, but are not limited to, unemployment benefits (Arbeitslosengeld), sickness benefits (Krankengeld), parental benefits (Elterngeld), and short-term work benefits (Kurzarbeitergeld). If you received any untaxed additional income exceeding 410 euros per year, you are also required to file. There are numerous other circumstances that can lead to a mandatory tax return:
In this article, you can learn more about when tax returns are mandatory.