Tax classes. Steuerklassen.

In Germany (and probably in many other countries), when you apply for a job, the contract specifies your salary for the year without tax deduction. The reason for this is that everyone may have different tax classes, of which there are 6 in Germany, and the taxes you have to pay will be calculated based on the tax class. What remains after you pay your taxes will be transferred to your card as honestly earned money. The tax class determines the amount to reduce your taxable income.

Let's get the terminology straight

The taxable income is the amount on which the tax is calculated.

For example, let's say that I have earned 100 euros and have to pay 30 % tax.

100 х 0,3 = 30 Euro.

In this example, 100 € is my taxable income, which is the basis upon which the tax I have to pay is calculated. 30 Euro is the amount of tax I have to pay.

Moving on

In simple terms, an amount is deducted from your wages and then the taxes you have to pay are calculated from the remaining amount. The deduction amount is called Steuerfreibetrag, which is based on the subsistence minimum (Existenzminimum or Grundfreibetrag, i.e. the amount that is not taxed) (in fact, there are a little more of these amounts that reduce the tax base, but we are not going into such thickets, we will run through the top, but who likes digging further, here are the names: Werbungskostenpauschale, Sonderausgaben, Vorsorgepauschale). The subsistence minimum is reviewed every year. For example, in 2021 it was 9,744 euros, in 2022 it was 9,984 euros, in 2023 it was 10,908 euros and in 2024 it is planned to be set at 1,604 euros (You can see it here and here).

It is important to note: The tax class does not affect how much tax you pay at the end of the year. The tax class determines what your net salary will be. At the end of the year, when you submit your tax declaration, the tax office will either refund some of the taxes you have paid (in the case of overpayment) or ask you to pay more (in the case of underpayment).

Now on to tax classes. As mentioned, there are 6 tax classes in Germany:

Tax class 1

A tax class is assigned if the following conditions are met:

• Single, unmarried and without children;
• Widowed (one year after the death of a spouse)
• Divorced or in the process of divorce and separated
• If the spouse lives abroad

With this tax class, the tax base is reduced by the Steuerfreibetrag.

Tax class 2

This class can be applied for by single parents under the following conditions:

• At least one minor child lives in the home and receives child benefit (Kindergeld)
• If there is no other adult legal guardian of the minor child living in the household

The state supports single parents with an additional reduction in taxable income (Entlastungsbetrag) that can be indexed (see link) and for the year 2023 is 4260 Euros for the first child and 240 Euros for every additional child.

Tax class 3 and 5

These tax classes are intended for married couples with children. It only makes sense to choose these classes if one of the spouses earns a lot more or one of the spouses does not work. In this case, the first spouse takes tax class 3 and the second spouse automatically gets tax class 5. The spouse with class 3 halves their tax base (because they take the second spouse's Steuerfreibetrag), while the spouse with tax class 5 pays taxes on their entire income. In a situation where the first has an income of €60,000 and the second sits at home unemployed with an income of €0 - the benefit is, I think, obvious.

Switching to tax classes 3 and 5 is voluntary and you can switch to and from this scheme every six months.

It is important to remember that with these tax classes you are required to submit a tax declaration for the previous year.

Note: It has been in the news that they want to cancel Classes 3 and 5 by July 2023 and replace them with Class 4 with a factor. In this case, those who earn more will pay more taxes, while those who earn less will pay less. As a consequence, the former will have less net income and the latter more, which seems fair to politicians.

Tax class 4

The tax class is intended for married couples with children whose salaries are about the same. In terms of taxation, this class is identical to the first tax class, the amount of all deductions (Grundfreibetrag, Werbungskostenpauschale, Sonderausgaben, Vorsorgepauschale) is the same. The only point is that here you can apply for an additional reduction of the tax base due to the Kinderfreibetrag, but you will not receive any children's money (Kindergeld).

In this tax class, the amount of tax paid is usually slightly higher than the amount of tax you should have paid, so I strongly recommend submitting a tax return (you do not have to submit one in this class), as in the vast majority of cases you will get a refund for the overpaid taxes (especially if there is a difference in the spouses' wages).

Tax class 4 with factor

The main difference from the normal tax class 4 is that here the taxes paid are calculated in proportion to the spouse's share of the total income. With this combination, you pay roughly the amount of taxes you will be assessed for the year. There are advantages to this - you get a slightly higher net salary, and you don't have to wait for your tax return to get some of the money paid back. But there are also disadvantages - you have to submit a tax declaration and you may have to pay something extra at the end of the year..

Tax class 6

This tax class applies to those who work in two jobs. In this case, one of the five classes can be chosen for the first job and the sixth class for the second job. There are no deductions for the sixth class.

Tax class 0

This class stands apart and is intended for those who work in Germany but live in another country. In order to avoid double taxation, tax class 0 was invented, under which you do not pay taxes in Germany, but at your main place of residence. For the tax class, you have to get confirmation from the tax office at your employer's place of residence, otherwise the employer will calculate taxes according to tax class 6.