Every year, the income tax return is due, which some taxpayers do themselves, others place the order for the preparation of the return in the hands of a tax advisor, as do business people and the self-employed . But what is the income tax and what there is for income tax return knowing?
Definition: what is income tax?
The state levies on the income of individuals income tax . This includes a total of seven types of income , including salaries and income from freelance and self-employed work . The tax flows proportionally to the federal government, the states and the municipalities and is therefore also referred to as community tax. It is considered the most important tax and alone accounts for around a third of all tax revenues of the state. This makes income tax even more important than sales tax .
According to Gradchem, all income tax regulations are based on the Income Tax Act . The calculations are regulated by the income tax rate. In principle, unlimited income tax liability applies to all persons who have their permanent residence in Germany. Employed persons who do not live permanently in the Federal Republic are subject to limited income tax .
Income tax or wage tax? That is the difference
The payroll tax is for all salaried employees raised so that employees pay income tax in principle. As soon as there is additional income or income from self-employment, experts speak of income tax. It is based on the different terms “wages” (wages for employees) and “income” (other wages, possibly plus wages).
Different income tax brackets
In Germany one generally speaks of tax classes. There are 6 tax brackets in which all taxpayers are classified according to their marital status. Anyone who has more than one job is assigned tax class 6 from the second job onwards. Spouses can choose between different tax brackets.
The current division into the six tax brackets looks like this:
|Tax class||Taxpayer status|
|Tax class I||for single persons (single, divorced, widowed) as well as married or registered partners who live permanently separated from each other.|
|Tax class II||for single parents|
|Tax class III||for widowed persons (in the year of death and in the following year) as well as for married persons or registered partners, if one partner has chosen tax class V or does not work or earn less.|
|Tax class IV||for married or registered life partners, if the partner also chooses tax class IV.|
|Tax class V||for married or registered life partners, if the partner chooses tax class III.|
|Tax class VI||for single and married persons or registered partners from the second of several jobs or if the income tax card is not presented.|
As soon as the marital status changes (marriage, death, birth of a child as single, acceptance of further jobs), the tax class is adjusted .
Income tax principles
The Income Tax Act acts according to the following principles or the calculation of income tax is based on these principles:
- World income principle
All natural persons who have an income and are taxable in Germany must pay tax on their entire income (including the income generated in other countries ).
- Net principle
Only net income (income minus business expenses and business expenses ) is taxed .
- Taxation based on ability
citizens with the same income are taxed the same, different incomes are subject to different taxation . It is an actual taxation .
- Periodicity principle
Income is taxed according to periods , regardless of earlier or later periods.
- Principle of differentiated rates
The income is taxed progressively, that is, there is a staggering of control depending on the income level.
It is important to mention that the taxes are levied for a specific assessment period . As a rule, this is the calendar year for income tax . Traders can, for example, adapt their business year to the calendar year or choose a different business year .
Income tax law: what has to be taxed?
The legislature knows seven different types of income . All income must be taxed, including some profits. The important thing is whether the winnings could only be achieved through luck (luck decides whether to win or lose, for example the lottery) or whether it is a matter of reward . This applies, for example, to the award of prize money or profits from participation in television shows.
This means that all income that natural persons receive is subject to income tax , including interest or rental income. However, every taxpayer has a basic tax allowance of 9,408 euros (2020) . Income tax is only due when this limit is exceeded. Single and married persons have twice the tax exemption.
Income Tax Liability – Taxable Income Types
All income from the following activities is taxed :
- Agriculture and Forestry
- Commercial enterprise
- Self-employment in a partnership
In addition, the following income comes from:
- Capital assets
- Rental and leasing
- Other Income
As already mentioned above, income from competitions may also be added. Lotto and Co. are not automatically tax-free!