Although retirement typically marks the end of one’s working life, it doesn’t mark the end of tax returns – retirement benefits are not tax-free. You may have some questions regarding this: how are retirement benefits actually taxed? What expenses can I still claim on my tax return? In this article, we will fill you in!
What’s the difference between retirement benefits (Renten) and pensions (Pensionen)
The tax office (Finanzamt) distinguishes between retirement benefits and pensions. Retired civil servants, judges, soldiers, and their widows receive pensions which are considered subsequent income from their employment. Retirement benefits, on the other hand, are classified as additional income. This article focuses on classic retirement benefits which have been taxed on a deferred basis since 2005. This includes:
- Statutory retirement benefits
- Retirement benefits from occupational pension schemes
- Retirement benefits from agricultural pension funds
- Retirement benefits from Rürup pensions
Reduced earning capacity retirement benefits, survivor’s retirement benefits and statutory retirement benefits for miners are also taxed on a deferred basis.
What is deferred taxation (nachgelagerte Besteuerung)?
Previously, retirement benefits came from income that was already taxed while later they became mostly tax-free – this is referred to as upstream taxation. The reform of the Retirement Income Act in 2005 reversed the existing system: from 2040, paid retirement contributions will be tax-free up to a maximum amount and the benefits will not be fully taxed until many years later when they are paid out.
In order to make the transition from upstream to downstream taxation of retirement benefits as fair as possible for all age groups, the government at the time decided on a transition period of 35 years.
How will retirement benefits be taxed up until 2040?
In 2005, this change was introduced to retirement benefits paid out and 50% of the gross benefits paid out were considered taxable income. This percentage was increased by two percent each year up until 2020 and as of 2021, this percentage will only raise by one percent each year until the end of the transition period in 2040, when the full amount will be considered taxable income.
One’s specific tax rate for their retirement benefits vary on which year they retire, therefore, someone who retired in 2021 receives retirement benefits that are 81 percent taxable for the rest of their life. Someone who retires in 2022 will receive retirement benefits that are 82 percent taxable for the rest of their life, etc. The following table provides a good overview of how the tax rate for retirement benefits increases over the years:
|Retirement Year||Taxable Portion of Benefits||Retirement Year||Taxable Portion of Benefits||Retirement Year||Taxable Portion of Benefits|
|2005||50 %||2017||74 %||2029||89 %|
|2006||52 %||2018||76 %||2030||90 %|
|2007||54 %||2019||78 %||2031||91 %|
|2008||56 %||2020||80 %||2032||92 %|
|2009||58 %||2021||81 %||2033||93 %|
|2010||60 %||2022||82 %||2034||94 %|
|2011||62 %||2023||83 %||2035||95 %|
|2012||64 %||2024||84 %||2036||96 %|
|2013||66 %||2025||85 %||2037||97 %|
|2014||68 %||2026||86 %||2038||98 %|
|2015||70 %||2027||87 %||2039||99 %|
|2016||72 %||2028||88 %||2040||100 %|
If you calculate the difference between your retirement benefits and the taxable portion of your retirement benefits, you will find the amount for the so-called pension allowance (Rentenfreibetrag) – AKA the portion of your benefits that are tax-exempt.
What percentage of my retirement contributions can be claimed on my tax return?
The amount of your retirement contributions that can be claimed on your tax return slightly adjust each year due to the tax changes for retirement benefits. The aim was to reduce the tax on retirement contributions as the tax on retirement benefits increases. As a result of this goal, a larger percentage of retirement contributions can be claimed on your tax return with each new year. This can be seen in the table below:
|Tax Year||Deductible Provisional Expenses||Tax Year||Deductible Provisional Expenses|
|2005||60 %||2016||82 %|
|2006||62 %||2017||84 %|
|2007||64 %||2018||86 %|
|2008||66 %||2019||88 %|
|2009||68 %||2020||90 %|
|2010||70 %||2021||92 %|
|2011||72 %||2022||94 %|
|2012||74 %||2023||96 %|
|2013||76 %||2024||98 %|
|2014||78 %||2025||100 %|
Your pension contributions can be claimed on your tax return now as special expenses (Sonderausgaben)! Deduct your special expenses and file your tax return today!
Can this change be disadvantageous for me?
The gradual changeover from pre-taxation to deferred taxation of retirement benefits has already led to numerous lawsuits. For example, both a dentist and a tax consultant filed lawsuits due to their opinion that the changeover could lead to double taxation for them because of simultaneous double taxation of both retirement benefits and contributions.
On May 19, 2021, the Federal Fiscal Court (Bundesfinanzhof, BFH) ruled that double taxation did not occur in both aforementioned cases (file numbers: X R 20/19 and X R 33/19). Nevertheless, the highest German fiscal court still pointed out that the change could result in prohibited double taxation; in order to prevent this in the future, they laid down mandatory calculation methods to determine double taxation. Double taxation can occur when the retirement contributions from your taxed income are greater than the inflow of your tax-free benefits. Since the BFH ruling took place, the basic tax-free allowance (Grundfreibetrag) can no longer be included in the calculation of tax-free retirement contributions.
How does the BFH’s ruling affect me?
Although the Federal Fiscal Court was unable to determine double taxation in their ruling, there is still a possibility that the changes could lead to it – especially for retirement groups from 2025 onwards. In the future, it won’t be sufficient to simply offset the portion of retirement contributions you’ve made with retirement/pension allowances (Rentenfreibeträge) - this proves there is a need for tax reform. In the summer of 2021, German Finance Minister Olaf Scholz pointed out that a future tax reform could prevent possible double taxation, but it is still unclear what will change in the new legislative period.
Due to this, we advise you to hang on to all of your tax assessment notices (Steuerbescheide), notices of your retirement payments, and maybe even your tax returns. Tax offices (Finanzämter) have been asked provisionally to determine your deferred retirement taxation, and as soon as retirement taxation laws are adjusted, your tax assessment should be corrected automatically. With this being said, you should check whether your tax assessment notice contains a preliminary notice (Vorläufigkeitsvermerk) – if it does, your case regarding retirement taxation will be automatically kept open and an appeal must not be filed.
Do I have to pay taxes if I’m retired and when do I have to file a tax return?
Even if you’re retired, the general tax principle applies: As soon as your income exceeds the basic tax-free amount (Grundfreibetrag), income tax must be paid. The basic tax-free amount for the 2020 tax year is 9,408 euros and for 2021 9,744 euros, income from retirement benefits that don’t exceed these amounts remain tax-free. If you choose to be assessed together with your spouse (Zusammenveranlagung), the tax-free amount doubles. Any additional income such as from renting and leasing or capital investments counts towards your total income – if your benefits together with your additional income push you over the basic tax-free allowance, you will have to pay taxes on the excessive amount.
Among other reasons, you are required to file a tax return if:
- You earn additional income that exceeds 410 euros per year
- You receive income from traditional or freelance employment in addition to your retirement benefits
A detailed article explaining who is required to file a tax return can be found here. Keep in mind, even if you aren’t required to file, it’s almost always worth it to do so! In fact, those who submit a voluntary tax return receive an average tax refund of 1.095 euros.
As a retiree, what can I deduct from my taxes?
Even when you’re retired, you can deduct income-related expenses (Werbungskosten), special expenses (Sonderausgaben), and possibly even extraordinary expenses (außergewöhnliche Belastungen). Some examples of income-related expenses include:
- Account maintenance fees for the checking account where you receive your retirement benefits
- Union dues
- Expenses for a retirement/pension consultant
- Legal fees or litigation costs incurred from your retirement plan application
- Costs for tax software
Some examples of special expenses include:
- Contributions to health insurance, nursing care, and motor vehicle liability insurance
- Church tax
If you do not claim anything on your tax return, the tax office automatically applies a lump sum of 102 euros for income-related expenses and 36 euros for special expenses for retirees.
An additional tip: If you need help in your household and therefore hire an outpatient caregiver, these costs can be claimed on your tax return as household-related expenses (haushaltsnahe Dienstleistungen). Additional tax tips for retirees can be found here!