Applying for Wage Tax Reductions

It would surely be ideal if we could earn as much money as we wanted, no questions asked. We wouldn’t have to worry about how to pay for the next auto repair and our children could attend private universities; however, of course, things aren’t typically so simple. Most of us work 5 days a week to make ends meet and ensure we can pay all the necessary bills when the end of the month rolls around. Even with a reasonable income, we typically can’t afford to do everything we want. Wouldn’t it be nice if so much wasn’t deducted from your gross salary and you could afford some more luxuries with your net earnings?

Naturally, your gross and net salary will never be identical. With this being said, there is a way to close the gap between these two values a bit. In this article, we will fill you in about the wage tax reduction application and what it can mean for you.

What is a wage tax reduction application (Lohnsteuerermäßigungsantrag)?

This application can be used to apply for allowances from the tax office (Finanzamt). Allowances (Freibeträge) can reduce your taxable income while also reducing the amount that your employer must withhold from your wages, this results in a larger paycheck at the end of each month. Allowances help reduce your tax burden immediately – essentially, expenses that could be reclaimed on your tax return are reimbursed the same month that you incurred them.

Allowances can be claimed by the end of November of the current year with a wage tax reduction application. More net income will then be left over for the following month.

Note: Those who receive Christmas bonuses should submit their wage tax reduction application to the tax office by October at the absolute latest to be able to save a large chunk of money.

What types of allowances are there?

Allowances exempt a determined sum of money from being taxes, anyone who earns more than this must pay tax on the difference.

Allowances are typically granted when life circumstances arise that lead to the taxpayer incurring high expenses. Regarding income tax assessment, allowances are approved in the Income Tax Act (Einkommensteuergesetz), the Inheritance Tax Act (Erbschaftsteuergesetz), the Trade Tax Act (Gewerbesteuergesetz), and the Corporate Income Tax Act (Körperschaftsteuergesetz).

The most important allowances include

Education allowance (Ausbildungsfreibetrag)
Basic tax-free allowance (Grundfreibetrag)
Discount allowance (Rabattfreibetrag)
Child allowance (Kinderfreibetrag)
Child care allowance (Erziehungsfreibetrag)
Income tax deduction allowance (Freibetrag bei den Lohnsteuerabzugsmerkmalen)
Savings allowance (Sparerfreibetrag)
Volunteering allowance (Ehrenamtsfreibetrag)
Allowances for inheritance or gifts (Freibeträge bei Erbschaft oder Schenkung)

Since October 2015, tax allowances can be claimed for two years instead of just one. The allowance is an annual amount and is distributed over the months following your application submission.

Minimum expenses to profit from allowances

In order to apply for allowances, one must incur at least 600 euros in expenses during the current calendar year. An employee lump sum (Arbeitnehmerpauschbetrag) is automatically deducted for every taxpayer each year in order to help measure this value.

There are several ways to exceed the application limit. Expenses can include a variety of things including special expenses (Sonderausgaben) and extraordinary expenses (außergewöhnliche Belastungen).

How do I apply for income tax allowances?

There are a few things to consider when applying for an allowance. An appropriate form must be chosen depending on whether you are applying for a new allowance or changing an existing one.

The following forms are necessary:

For a new application, the official form “Antrag auf Lohnsteuer-Ermäßigung” (application for income tax reduction) is required.
For child allowances, tax class changes, etc., “Vereinfachter Antrag auf Lohnsteuer-Ermäßigung” (simplified application for income tax reduction) is required.

Claiming allowances leads to a mandatory tax return

Anyone claiming tax allowances is required to file a tax return as long as they are benefitting from said allowances. There are a few exemptions to this rule, including:

Taxpayers who claim the disability or survivor allowance (Behinderten- or Hinterbliebenenpauschbetrag)
The number of child allowances (Kinderfrebeträge) has changed
Those receiving wages less than 11,000 euros