Tax Classes in Germany: Can you save Money?

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Michael Ruppel

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Tax classes in Germany: a guide

Choosing the right tax class in Germany is important for financial planning. Germany has six different tax classes, each designed for specific life situations and family constellations. Here is a comprehensive overview of the German tax classes and what they mean:

Tax class I

For:

  • Single, divorced, widowed
  • Married people who are permanently separated
  • Persons who live in a registered civil partnership and are also separated

Special features:

  • Standard tax class for single people without children
  • Highest tax deductions compared to other classes for married couples

Tax class II

For:

  • Single parents

Special features:

  • Tax relief through an additional allowance for single parents
  • Only applies if at least one child is living in the household who is entitled to child benefit

Tax class III

For:

  • Married couples or couples living in a registered marriage where one partner earns significantly more than the other
  • The partner with the higher income chooses this class

Special features:

  • Lower tax deductions
  • Can be combined with tax class V for the lower-earning partner
  • Advantageous if one partner has little or no income

Tax class IV

For:

  • Married couples or couples living in a registered civil partnership with similar incomes

Special features:

  • Both partners have the same tax class and pay the same tax deductions
  • Favorable for couples with similar salaries

Tax class IV with factor

For:

  • Married couples or couples living in a registered civil partnership

Special features:

  • Calculation of a factor based on the income of both partners
  • The aim is a fairer distribution of the tax burden
  • Avoidance of high additional payments or refunds at the end of the year

Tax class V

For:

  • Married couples or couples living in a registered civil partnership where one partner has chosen tax class III

Special features:

  • Higher tax deductions compared to class III
  • Partner with the lower income choose this class
  • Makes sense if one partner earns significantly more than the other

Tax class VI

For:

  • Employees with several jobs or income from different employment relationships

Special features:

  • Highest tax deductions
  • Is applied for the second and each additional employment relationship

Changing tax classes

It can make sense to change tax class in order to optimize your monthly tax burden. It is particularly worthwhile to adjust your tax class in the event of changes in marital status or significant changes in income. married couples can choose between the combinations III/V and IV/IV (with or without factor), depending on what is most favorable for their financial situation.

The III/V combination leads to a higher monthly net income, but usually to an additional tax payment. With III/V, the submission of a tax return is also mandatory.

Regardless of whether married couples are in III/V or IV/IV or IV/IV + factor, they always end up with the same tax burden with the tax return (additional payment or refund). 

Tax class and annual wage tax adjustment

The choice of tax class not only affects the monthly net income but also the annual wage tax adjustment. In the annual tax return, any over- or underpayments are corrected by the annual wage tax adjustment. It is therefore important to choose the right tax class if you want to avoid high additional payments or unexpected refunds.

Conclusion

German tax classes are designed to reflect different life situations and family constellations. The right choice of tax class can have a significant impact on the monthly tax burden and should be carefully considered. Married couples should regularly check which combination best suits their financial situation, while single parents and employees with multiple jobs should make sure they are in the optimal tax class. An informed decision will help to minimize financial burdens and maximize net income.