Financial Assistance for Parents Frequently Triggers Tax Rebates
In Germany, receiving parental allowance (Elterngeld) can have unexpected consequences when it comes to taxes. The allowance is often considered part of your overall income and is subject to the progressive income tax system, which means it can push your total income into a higher tax bracket, a phenomenon known as the "progression clause" (Progressionsvorbehalt). While the allowance itself is tax-free, it influences the tax rate applied to other income, potentially leading to higher taxes owed.
For couples, choosing the right tax assessment method can help reduce the tax burden. Separate assessment (Einzelveranlagung) means each spouse is taxed individually on their own income and allowances. This can be advantageous if one spouse receives parental allowance while the other has a much higher income. Since the progression effect is calculated separately, the spouse receiving parental allowance may stay in a lower tax bracket, thus reducing the overall tax payment for the couple compared to joint assessment (Zusammenveranlagung).
Joint assessment combines incomes and allowances and then applies the tax rate on the combined amount. This is often beneficial for couples with similar incomes but can lead to higher tax payments if one partner has parental allowance and the combined income pushes the couple into a higher tax bracket.
Therefore, electing for separate assessment can optimize tax savings for couples where one receives parental allowance and the other earns significantly more, mitigating the impact of the progression clause and resulting in lower tax payments overall.
It's important to note that the closer the taxable incomes of the spouses are to each other and the higher the parental allowance, the greater the advantage of separate assessment. To avoid unexpected end-of-year tax payments, it is recommended to prepare the tax return early and build up reserves in good time.
The German Taxpayers' Association suggests another option for avoiding unexpected tax payments: switching to Parental Allowance Plus. This option spreads the payments, helping to manage tax obligations.
It's crucial for consumers to be aware of their legal questions regarding taxes, especially when it comes to parental allowance and tax returns. Self-employed individuals may also have the option of shifting income in time to reduce the impact of the progression allowance.
In summary, parental allowance can affect tax payments in Germany due to its impact on total taxable income. Couples can benefit from separate tax assessment to reduce tax owed when parental allowance is involved, especially if incomes differ significantly. To ensure the best possible tax outcome, it's recommended to consult with a tax advisor and submit the tax return early.
- To further mitigate the "progression clause" impact on personal-finance for couples in Germany, one might consider adjusting their employment policy by juggling employment schedules or salaries to minimize the income gap between spouses, thereby reducing the advantage of separate tax assessment and potentially lowering taxes.
- In light of the influence of community policy on personal-finance, namely the parental allowance, it would be prudent for self-employed individuals to strategize their finance management and employment policy, possibly by delaying income receipt close to the tax filing date to lessen the impact of the progression clause on their overall tax liability.
