Mandatory tax assessment: who has to file a tax return?

INDEX

• Self-Employed Persons

• Do Employees have to file a Tax Return?

• Circumstances that lead to a Mandatory Tax Assessment

• Do Retirees & Pensioners have to submit a Tax Return?

• Supplementary Income up to 410 euros remains tax-free

• Submission Deadlines

• Lateness Penalty Fees

A Tax Return is Mandatory for Self-Employed Persons

Self-employed workers (freelancers and tradespeople) are typically required to file a tax return provided that their income exceeds the tax exemption limits. The Basic Tax-Free Allowance (Grundfreibetrag) for the 2023 tax year is 10,906 euros and will increase to 11,604 euros in 2024.

Do Employees have to file a Tax Return?

Every month, your employer pays part of your salary to the tax office as wage tax (Lohnsteuer). This is called wage tax deduction (Lohnsteuerabzug) and is an advance payment on your annual income tax, which you pay on income from employment. When you file your income tax return, the income tax you have already paid in advance will be credited against your final tax liability (Steuerschuld).

You will receive your annual payslip (Lohnsteuerbescheinigung) for the previous year from your employer by the end of February at the latest. This form will reflect your salary and taxes you paid in the previous year, including wage tax and church tax, if applicable.

According to § 25 Paragraph 3 Sentence 1 of the Income Tax Act, each taxpayer must file a tax return for the previous assessment period. Nevertheless: If all or part of your work is non-self-employed and a respective wage tax was carried out, tax liability is only required under certain premises.

Circumstances that lead to a Mandatory Tax Assessment for Employees

The circumstances for when a tax return must be filed are regulated in § 46 of the Income Tax Act (EStG). If at least one of the listed criteria applies to you, the Tax Office (Finanzamt) will assume that your tax liability exceeds your advance tax payment(s) and you will be required to file a tax return.

1. Supplementary Income (Nebeneinkünfte)

• Income received from multiple employers simultaneously during the calendar year is subject to a deduction according to tax class VI and requires you to file a tax return.
• Taxable supplementary income greater than 410 euros per calendar year without a tax deduction requires you to file a tax return. Taxable supplementary income includes pensions, royalties, rental income, and investment income on which no settlement tax (Abgeltungssteuer) was paid, such as foreign investments. Taxable amounts greater than 410 euros refer to total income that may be reduced by Old-Age Relief Amount (Altersentlastungsbetrag) and tax reliefs for income from agriculture and forestry, when applicable.

2. Wage replacement benefits (Lohnersatzleistungen)

Did you receive more than 410 euros of wage replacement benefits during the calendar year? These are indeed tax-free, however, they are subject to the progression proviso (Progressionsvorbehalt), and consequently to tax assessment, because they can increase the tax rate (Steuersatz) of your customary income. The following, among others, count towards wage replacement benefits:

• unemployment benefits (Arbeitslosengeld I)
• short-term work benefits (Kurzarbeitergeld)
• sickness benefits (Krankengeld)
• parental benefits (Elterngeld)
• maternity benefits (Mutterschaftsgeld)

3. Income Tax Reduction (Lohnsteuerermäßigung)

If you applied for tax allowances (Freibeträge) for income tax deductions (Lohnsteuerabzug) (e.g. for income-related expenses (Werbungskosten), special expenses (Sonderausgaben), or extraordinary expenses (außergewöhnliche Belastungen), you are required to file a tax return in the following year. You pay a reduced wage tax in the current year and the Tax Office then checks whether these allowances correspond to your actual expenses.

However, there is no tax liability if your total allotted wages fall under the following amounts:

4. Domestic Partners & Parents

• A tax declaration is required for married couples who both receive employee wages and are taxed according to tax class V or VI. Those in tax class IV with (a) factor (procedure) are also required to file a tax return. (Steuerklasse IV mit Faktorverfahren).
• According to the Federal Finance Court (Bundesfinanzhof), if one spouse applies for individual assessment, both spouses are automatically obliged to file a tax return
• One is required to file a tax return if a spouse living in another EU country with limited tax liability is recognized in your ELStAM (wage tax deduction details).
• Widows or divorcees who remarry in the same year are also required to file a tax return. The same applies when your ex-partner remarries in the same year.
• Single, divorced, or permanently separated parents who do not wish to split the educational, disability, or survivor allowance (Ausbildungsfreibetrag, Behinderten-Pauschbetrag und Hinterbliebenen-Pauschbetrag) for their child 50/50 must file a tax return.

5. Other Compensation

• Have you received any special payments from your employer such as a severance package (Abfindung) or compensation for several years of service? If this income is taxed under the fifth method (Fünftelregelung), you are obliged to file a tax return in the following year.
• You are required to submit a declaration if, during the tax assessment period, you receive other payments (such as a holiday or Christmas bonus) from a new employer after a change of employment and your wages from your previous employment are not taken into account when calculating the income tax for these payments. You can recognize this by the capital letter S on your wage and tax statement. If you would like to avoid this tax assessment, simply provide your new employer with the tax statement from your previous employer.
• Payments from holiday funds or wage compensation from the construction industry also count as compensation that requires you to file a tax return.

Attention: Corona bonuses and Inflation bonuses are tax-free and are not required to be included on your annual payslip.

6. Provisions (Vorsorge)

Since the tax assessment period of 2010, your health and long-term care insurance expenses (Kranken- und Pflegeversicherungskosten) are taken into account during each monthly tax deduction through the provisional lump sum (Vorsorgepauschale). For this reason, the lump sum is no longer applied in the tax return itself. Instead, your actual insurance contributions (e.g. pension plan, health, long-term care and unemployment insurance) (Altersvorsorge, Kranken-, Pflege- und Arbeitslosenversicherung) are taken into account.

If your expenditures exceed the provisional lump sum, you can reclaim them by filing a tax return. If your tax-deductible insurance expenses are lower than the provisional lump sum, a tax assessment is also required, provided that your yearly wages are above 12,174 euros (individual taxation) or 23,118 euros (joint taxation) (as of 2023).

7. Residence Abroad

If your residence is abroad, but you’ve applied for unlimited tax liability in Germany, the Tax Office expects you to file a tax return.

8. Loss Carryforward and Loss Carryback (Verlustvortrag und Verlustrücktrag)

Have you reported a tax-loss to the Tax Office? Then you are required to file a tax return in the following year, until your loss is settled with other positive income.

Do Retirees & Pensioners have to submit a Tax Return?

• Retirees who have taxable income above the basic tax-free allowance (Grundfreibetrag) are also required to file a tax return. A lump sum of 102 euros for income-related expenses (Werbungskostenpauschale) is automatically deducted from their income. Of course, further expenses can be claimed as tax-exempt such as sickness costs or household-related services (haushaltsnahe Dienstleistungen). Nevertheless, retirees are not required to pay tax on their complete pension: the taxable part of the pension is based on the year in which they retired.

• Pension benefits (Pensionsbezüge) for civil servants in retirement are classified as income from non-self-employed work and are already taxed at the time of payment, minus the pension allowance (Versorgungsfreibetrag) and the supplement to the pension allowance (Zuschläge zum Versorgungsfreibetrag). Retirees who receive pension benefits from multiple employers are also required to file a tax return.

Supplementary Income up to 410 euros remains tax-free

Employees, civil servants, and retirees with supplementary income that is not subject to wage tax are not required to pay tax on it as long as it doesn’t exceed the exemption limit of 410 euros per calendar year. Supplementary income between 410 and 820 euros will be taxed at a reduced rate. This is known as compassionate allowance (Härteausgleich) and is automatically calculated by the Tax Office. For example, if you have rental income of 600 euros, the tax office deducts the 600 euros from 820 euros; 220 euros then remain tax-free, while the remaining 380 euros are taxable.

Please Note: In the case of joint taxation of married couples, the supplementary incomes will be added without doubling the exemption limit of 410 euros!

Submission Deadlines for your Tax Return

The tax return submission deadline for those subject to tax assessment is July 31st of the following year. The tax return submission deadline for voluntary tax returns is December 31st up to 4 years following the tax year in question.

Lateness Penalty Fees for overdue Tax Returns

Tax returns filed after the deadline are subject to painful penalties: a so-called late charge or penalty payments. The late charge (Verspätungszuschlag) amounts to 0.25% of the income tax to be paid and at least 25 euros per month! If you still do not complete your tax return, the Tax Office can, in addition, apply penalty payments (Zwangsgeld) as a punishment. The penalty payment for the first failure to file a tax return is often between 100 and 500 euros. Penalties can be significantly higher for those with high incomes, a penalty payment of up to 25,000 euros is possible.

If you are subject to tax assessment and do not file a tax return, the Tax Office must carry out a tax estimate (Steuerschätzung) and demand you to pay the estimated tax due. This amount is normally relatively high as you have not provided the Tax Office with your deductible expenses. After they have provided you with the estimate, you are given a month to make an appeal. Despite, you must still submit your tax return.