Income tax (Einkommenssteuer)
Income is basically divided between profitable income (commercial, agricultural or freelance activities) and surplus income (all other income such as salary or capital gains).
In this, there are special regulations for taxation in case of unlimited tax obligation (for example, the worldwide income principle, i.e. the taxation of all income gained worldwide) and in case of limited tax obligation (exclusive taxation of income gained in Germany).
Basis for taxation
The basis for assessment is the income to be taxed. This is determined by taking the profit or surplus, then deducting the tax-free living wage (basic exemption amount / steuerfreie Existenzminimum), various other exempted amounts (e.g. for children) and special expenses (e.g. for social security contributions or retirement insurance).
Rate of tax
Income tax is set percentually. The tax rate begins at 14 percent and increases with the taxable income, progressively up to 45 percent. The tax rate also depends on whether the taxable person is single (base rate) or married (split rate). The solidarity surcharge is added onto the income tax.
The income tax rates and the tax-free basic exemption amount per person have developed as follows in recent years:
Reporting and payment to the tax office
The income tax must be reported and paid to the tax office after the end of the calendar year as part of the income tax return.
Generally, the tax office will determine quarterly prepayments on tax.
Special handling of taxation on salary and capital gains
For the taxation of salary and wage, salary tax (wage tax) is applied. It is part of the income tax and is therefore calculated according to the same legal regulations. However, tax calculation, tax deduction and payment to the tax office are carried out by the employer directly from the employee’s salary, so that he will only receive his already taxed salary and – with few exceptions – will not have to submit his own tax return for the tax office (but in many cases he can get a tax refund at the end of the year and so submitting a tax return can be an advantage).
Salary tax exists from the point in time when the salary is paid, and not only at the end of the calendar year like “normal” income tax. Therefore it is withheld from the monthly salary and paid to the tax office.
In Germany there is a capital gains tax on capital gains. This is a special form of income tax. You can find more details about this on the page Capital Gains Tax.