6 Legal Tax Tricks In Germany
Do you feel that you pay too many taxes in Germany? Our 6 legal tax tricks will help you to take advantage of the German Tax Code by lowering your personal tax rate. 🤑
Table of contents
Introduction: Higher Income = More Taxes?
Many people believe that the more money you make in Germany, the more taxes you have to pay to Finanzamt. That is not necessarily true. If you understand the German Tax Code just well enough in order to use the rules to your advantage, you can save a lot of money by lowering your effective tax rate. And that is what our 6 legal tax tricks in Germany will do for you.
Rules of taxation in Germany are quite difficult. So difficult even that many people shy away from filing their taxes or planning their personal taxation smartly in advance. A little (financial) planning can go a long way. Our 6 completely legal tax tricks in Germany will make saving taxes as easy as possible for you. Without telling you to start a business or hire expensive tax advisors. This article will help everyone save taxes when filing their tax declaration here in Germany.
As employees in Germany have their income tax deducted from their payslips automatically, it is highly likely that they pay too much in taxes to the German government. The German Federal Statistical Office published recently that 9 out of 10 people filing their taxes in Germany receive on average 1.051€ in tax money. The 6 legal tax tricks that we ranked in terms of tax savings potential vs. effort to declare in your tax declaration will help you to secure an average of 1.051€ as well – and maybe even a lot more than that.
Please note that PerFinEx GmbH is no tax advisor. Therefore, the tax tricks in this article are no personal tax advice. Please reach out to a professional tax advisor if you have any questions about your personal tax declaration. If you would like to plan your personal finances (which involves taxation every once in a while), we are happy to help you either on WhatsApp or in a 1-on-1 meeting. There are certain investments that can help you save taxes in the future, but we cannot file your taxes for you.
German Tax Trick #1: File Your Tax Declaration Intentionally Late
This tax trick will most likely surprise you. Instead of telling you to file your taxes as early as possible, you can take your time, relax, and wait until doing your German tax declaration because you might earn some penalty interest from Finanzamt. Since 9 out of 10 people that file their taxes in Germany get money from the government, it is highly likely that you will earn penalty interest instead of paying penalty interest to Finanzamt.
Important to note is that this tax trick only works if you file your taxes on a voluntary basis and are not forced by the German government to do it. For most people living in Germany, it is not mandatory to file taxes, which proves one more time the point that it is most likely beneficial for you to file your taxes – even if you file your taxes voluntarily. Please see our German Tax Guide 2022 for further details if you have to file your taxes mandatory.
Why file your taxes late? 15 months after the end of any given tax year (e.g. April 2022 for the tax year 2020), the German Tax Code mentioned a penalty interest of 0,5%/month or 6%/year. This penalty interest works in either way: If you owe Finanzamt money, you have to pay 0,5% penalty interest every month that you filed your taxes after 15 months. If Finanzamt is owing you money, they have to pay you 0,5% penalty interest.
As we determined earlier that it is highly likely you will get an average tax refund of 1.051€, it is also highly likely that you will receive penalty interest from the German government. 6% guaranteed interest is a lot better than the interest you get on German bank accounts, savings accounts in the EU, or high-yield fixed-term savings accounts in the EU. As you have 4 years to file your taxes voluntarily, you can generate the 6% penalty interest every single year for a nice passive income that you do not have to work for.
In 2022, the German Constitutional Court decided that a 6% interest rate is too high in the current interest rate environment and therefore unconstitutional. According to the new draft of the law, the penalty interest shall be decreased to 0,15%/month or 1,8%/year starting backward in 2019. The German government has time until July 31, 2022, to determine a new penalty interest rate that is in line with the German constitution and shall be valid at least until January 1, 2026.
German Tax Trick #2: Take A Faster, But Longer Way To Work
Our tax trick #2 to increase your German tax return is a little more work than doing nothing, but you can also earn a lot more money with it. As the expenses you have to commute to your place of work can be deducted from your taxable income, you can take a longer way to work (in terms of kilometers) that is more efficient and saves you time (Find out how to get more net income here). The only limitation: The route you take must be a direct route from your home to your place of work. You cannot drive in circles across the town.
Let us imagine that you live in the north of Munich and work in the south of Munich. The shortest distance between your home and your place of work would be directly through the city center with e.g. 24 kilometers in 39 minutes according to Google maps. As that route through the city is full of traffic lights, taking the outer ring from the north of Munich to the south of Munich with e.g. 45 kilometers is almost twice as long but also shorter as Google maps estimates only 33 minutes.
Given the increased 21 kilometers in our example one way, you can deduct an additional 30 cents per kilometer from your taxes (=6,30€ per drive) while saving also 6 minutes of your precious lifetime. That might not sound like an enormous amount of money but if you drive to your primary place of work for 200 days a year, this slight change will save you not just 20 hours of your life every year, you can also deduct an additional 1.260€ in costs from your taxes.
German Tax Trick #3: Home Office Or Separate Work Room
Since the start of the COVID-19 pandemic, you are not driving to your office anymore and are working from home? If that is the case then our tax trick #3 has got you covered as you can decrease your taxable income just by working from home. Before the pandemic, there have been very strict rules by Finanzamt when it came to working from home. Nowadays almost anyone can declare a home office when filing their taxes given your job allows you to work from home.
A home office is defined as any space in your home that you can use for work purposes (e.g. a desk or a table in your living room). You can declare all costs that you have to create that working space (e.g. for a desk, chair, monitor, etc) as well as 5€/day that you work from your home office. Attention: The current maximum amount of days you can deduct from your taxes are 120 days/year. If you work more often from your home office than that, you cannot declare the additional days.
Some people have not just a desk at home to do their work, some people also have a separate office room with a door that they can lock. Defined by German Finanzamt, a separate room can be declared as an office room if it is being used at least 90% of the time for work purposes. A desk in your bedroom will not be accepted by Finanzamt. When having an accepted workroom, you can deduct even the share of your rent that you pay for this workroom from your taxes.
German Tax Trick #4: "Arbeitnehmer-Pauschbetrag"
Tick #4 to increase your German return is for lazy people. If you are too lazy to file your German taxes in general, there is not much that we can do to help you save money. If you can spare about an hour per year, you can file your taxes easily online and even in English with tax software providers like Steuergo, Taxfix, or Wundertax (links will secure you bonuses 😉).
If you want the maximum tax return possible, you have to create tax-deductible costs, you have to spend time on your tax declaration, and you have to be sure Finanzamt accepts the expenses you are trying to declare. If you want none of this, you can simply use the “Arbeitnehmer-Pauschbetrag” which translates to 1.000€ expenses that you can declare as a flat rate without any proof. Married couples can declare 2 x 1.000€ of course and utilize the Arbeitnehmer-Pauschbetrag twice creating 2.000€ in costs (that you did have or did not have in reality).
German Tax Trick #5: Pensions Level 1 & Pensions Level 2
Tax trick #5 can help you increase your German tax return by more money than all the previous 4 tax tricks combined. As the German public pension is running out of money faster than ever before, the government keeps looking for ways to incentivize people living in Germany to save for their retirement. And that is why all German pensions offer certain tax benefits either sooner or later:
- Pensions level 1 offers tax benefits while contributing (potentially the highest of all German pensions)
- Pension level 2 offers tax benefits – and maybe even government bonuses or savings in social security contributions
- Pensions level 3 offers tax benefits when receiving your payout in the form of a lumpsum payment or a life-long monthly pension
Pensions in level 1 are the German public pension (“Deutsche Rentenversicherung“) as well as the base pension (“Rürup Rente“). As the German public pension is part of the German social security system, it is mandatory for all employees in Germany to contribute. A base pension is a private pension scheme and therefore voluntary. Contributions to pensions level 1 are tax-deductible up to 25.639€/year for singles or up to 51.278€/year for married couples.
Level 2 pensions are the Riester pension as well as the company pension that you can get through your employer. Even though the maximum tax deduction for a Riester pension is much lower than for pensions level 1 with just 2.100€/year, the Riester pension will secure you government bonuses as well (calculate your Riester bonus here). The tax deductions of a company pension can be higher than the deductions of a Riester pension, a company pension will most likely also save you money in terms of social security contributions of a maximum of 6.816€/year. The details depend on the type of company pension scheme that your employer is offering you.
The only pensions that do not offer any tax benefits while contributing are pensions in level 3. These private pensions offer their tax benefits later in life when receiving your payout. As the German government is not supporting you throughout the savings phase with tax benefits or other perks, private pensions in level 3 offer flexibilities that other pension levels may be lacking. That is also the only pension level that offers the free choice if you would like all your contributions paid out in a lump sum or in form of a monthly pension until the rest of your life (Find out which pension is right for you here).
German Tax Trick #6: Real Estate As An Investment
The last tax trick #6 can save you potentially so many taxes, that we cannot even assign a number to it. The only requirement to save taxes with real estate is that you are not living in the property yourself, it has to be an investment property. Unlike in the U.S., the German government does not care if live in a rented property or bought a property for yourself (find out if renting or buying is better for you here). The German government will reward you only if you provide living space for someone else.
When renting out an investment property, Finanzamt automatically assumes that you do this with the intention to make a profit (which is most likely correct anyway). Therefore, all costs that you have with this property can be deducted from your taxable income:
- The interest rate that you pay to the bank for your mortgage (not the principal)
- Purchasing costs like ground taxes, notary, and real estate agent
- Costs for property management in case you do not take care of the property yourself
- 2% – 8% depreciation (property losing book value from a tax perspective)
- Renovation and modernization costs that will increase the value of your property
The potential tax savings from investing in rental properties are virtually unlimited. You can also deduct costs you have indirectly because of your rental property like costs for a professional tax advisor. The tax benefits associated with investing in real estate are one of the many reasons why people can get tremendously wealthy with rentals over time. You can generate a lot of cash flow in terms of rental income as well as the appreciation of your property while legally calculating yourself poor in front of Finanzamt to increase your tax return.