Learn 80% about Taxes in Germany in under 13 Minutes

If you’re an expat or a resident navigating taxes in Germany, these three questions probably sound familiar

1. Why does my salary seem to shrink so much after deductions?
2. What’s the difference between income tax and all these social contributions?
3. How can I legally reduce my tax burden without losing sleep over the paperwork?

In this article, I’ll break down Germany’s progressive tax system, and you will probably be able to learn 80% of the most important things about Taxes in Germany every expat should know. Let’s get started!

Tax Classes in Germany

Germany’s tax system includes six tax classes that influence the amount of income tax withheld from your salary. Your tax class is determined by your marital status and other personal factors:

• Class I: Single or separated individuals.
• Class II: Single parents.
• Class III: Married individuals if one spouse earns significantly more, and the other opts for Class V.
• Class IV: Married individuals with roughly equal earnings.
• Class V: Married individuals, complementary to Class III.
• Class VI: Individuals with multiple jobs.

As an expat, you will typically be assigned Tax Class I automatically. If your circumstances differ (e.g., you’re married or have children), you must inform the tax office to assign you the appropriate tax class.

Even when you register your marriage in Germany, both partners are automatically assigned Tax Class IV, regardless of income disparities.

Germany’s Progressive Tax System

Germany operates a progressive tax system. For 2025, the tax brackets are as follows:

• 0%: Up to €12,084 (tax-free allowance).
• 14% to 24%: €12,085 to €17,430.
• 24% to 42%: €17,431 to €68,430.
• 42%: €68,431 to €277,825.
• 45%: Above €277,825.

It’s important to note that these rates apply incrementally. For example, if you earn €68,430, your average income tax rate would be approximately 26.46%. You actually wont pay 42% taxes in Germany. This is because different portions of your income are taxed at varying rates.

Social Contributions in Germany: An Overview

In addition to income tax, Germany requires social contributions, which fund various social benefits:

• Pension Insurance (Rentenversicherung): 18.6% of gross income.
• Health Insurance (Krankenversicherung): 14.6% of gross income, plus an additional supplemental rate averaging around 1.6%.
• Unemployment Insurance (Arbeitslosenversicherung): 2.4% of gross income.
• Long-Term Care Insurance (Pflegeversicherung): 3.05% of gross income, with childless employees over 23 paying an additional 0.25%.

These contributions amount to approximately 40% of your gross income. However, this burden is shared equally between you and your employer, meaning about 20% of your gross income goes toward these social contributions.

For high-income earners, social contributions are applied only up to a maximum income threshold, known as the Beitragsbemessungsgrenze (contribution assessment ceiling). Once your income exceeds this threshold, no additional contributions are deducted for the portion of your income above the limit.

• Health and Long-Term Care Insurance (2025): €66,150 per year.
• Pension and Unemployment Insurance (2025): €96,600 per year.

These social security contributions are mandatory, even if your income falls below the tax-free allowance. For example, international students earning below €12,084 aren’t liable for income tax but must still pay health insurance premiums. Depending on your job contract, you may also be responsible for other social contributions. The only job contract exempt from social contributions and income tax is the Mini Job.

The Impact of Tax Classes on Income Tax and Social Contributions

Tax classes determine how much income tax is withheld from your paycheck each month; they do not impact your final tax liability. Your final income tax liability is calculated based on progressive income tax rates applied to your total taxable income for the year.

Sample Calculations for Taxes in Germany:

• John: Single, Tax Class I, earns €50,000 annually.
• Adam and Sara: Married, Adam in Tax Class III earning €50,000 annually, Sara in Tax Class V with no income.

John’s withholding is calculated based on his salary alone, and he pays tax at the standard progressive rate, with no adjustments for marital status or dependents.

Adam’s Tax Class III allows for lower monthly withholding because it assumes that Sara, in Tax Class V, has a significantly lower or no income. This creates a “split income” effect, where the higher earner is taxed as though the couple’s combined income is evenly distributed between them. Sara, in Tax Class V, results in very high withholding—even if she has no income.

The combined income of the couple is treated as a single unit under income splitting. This means the total taxable income is divided equally between the partners for tax calculation, leading to a lower tax rate (due to the progressive brackets).

At the end, Adam and Sara pay less taxes because the tax-free limit applies for each individual. Meaning that John pays 0% tax on €12,084 but Adam and Sara as a couple pay 0% on €24,168.

Social contributions are independent of tax classes and calculated strictly on gross income. In our example, Adam and Sara benefit from family insurance for Sara because she has no income, but the actual amount deducted for social contributions is identical for gross income levels, regardless of tax class.

Reducing Your Taxable Income in Germany

Filing a tax return can help reduce your taxable income, thereby lowering your income tax. There are many misconceptions about the process of tax returns in Germany, such as the belief that once you file a tax return, you must do so every year, or that submitting a tax return attracts unwanted attention from the tax office.

Clarifications:

• Voluntary Filing: If you’re not obligated to file a tax return, you can still do so voluntarily. In such cases, you have up to four years to submit your return. For example, in 2025, you can file returns for 2024, 2023, 2022, and 2021.
• Mandatory Filing: If you’re required to file a tax return (e.g., you received wage replacement benefits), the deadline is generally July 31 of the following year. However, if you work with a tax consultant, you may have an extension until March 1 of the subsequent year.

Failure to submit a mandatory tax return can result in penalties, including a late fee of 0.25% of the assessed tax, with a minimum of €25 for each month you’re late, up to a maximum of €25,000.

Understanding Tax Refunds in Germany

Many people misunderstand what a tax refund actually means. Here’s how tax declarations work in Germany and what a tax refund really is.

If your income in Germany exceeds the basic tax-free allowance (€12,084 for 2025), you are required to pay income tax. This applies to both student jobs and non-student jobs. You pay income tax on the portion of your salary that exceeds the tax-free threshold, based on Germany’s progressive tax system.

Your taxes are calculated automatically before you receive your salary. This is where the opportunity to file a tax declaration comes in. In a tax declaration, you provide information about relevant expenses that can reduce your tax burden.

Why File a Tax Declaration?

Your taxes are automatically calculated before you receive your salary. This is where the opportunity to file a tax declaration comes in. By filing a tax declaration, you provide information about relevant expenses that can reduce your tax burden.

These expenses can include:

• Work- and study-related costs
• Travel expenses
• Relocation costs
• Education fees
• And more

I’ve created a free guide that discusses these in detail—download it here.

How Does a Tax Declaration Work?

Based on the information you provide in your tax declaration, the tax office determines whether you have already paid the correct amount of tax or if you’ve overpaid.

On average, people who file a tax return get about 1,063 euros as a tax refund. However, you can drastically increase this refund if you include work- or study-related expenses in your tax declaration.

Eligible Expenses for Employees

If you’re an employee, eligible expenses include anything related to your work, such as:

• Commuting costs (traveling to and from work)
• Work-related purchases (e.g., mobile phone, laptop, printer, paper)
• Other job-related expenses depending on your situation

Related Guide: Tax Returns for Employees in Germany

Eligible Expenses for Students

If you’re a student, you can deduct expenses related to your studies, including:

• Education fees (e.g., registration and tuition fees)
• Study-related items (e.g., mobile phone, laptop, printing your thesis)
• Other study-related costs

Related Guide: Tax Return for Students in Germany

Tax Declaration Deadlines

If you’re not obligated to file a tax return, the deadlines don’t apply to you. You can declare taxes in Germany for up to four years in the past. However, you cannot file a tax declaration for a period older than four years.

What If You Haven’t Paid Much in Taxes?

You might say, “Ahsan, I haven’t paid much in taxes, so why should I file a tax return in Germany?”

My answer is: Tax Loss Carry Forward!

What Is Tax Loss Carry Forward?

A tax loss carry forward is a certificate issued by the German tax office when your income was too low to pay income tax, but you still had eligible expenses.

For example:

• If you earned only €5,000 in a year and didn’t pay any income tax, but you had travel costs, bought work clothes, or incurred study-related expenses, you can still file a tax return.
• The tax office will calculate your eligible expenses and issue a tax loss carry forward certificate.

How Can This Benefit You?

• This certificate can be used in your next year’s tax return to reduce your tax burden.
• If you don’t pay taxes the following year, you can declare expenses for that year and combine them with the previous year’s certificate.
• The tax office will issue a new tax loss certificate that includes both the prior year’s amount and the current year’s expenses.
• You can carry forward a tax loss certificate for up to seven years—this is especially beneficial for students who don’t have taxable income now but will later.

How to File a Tax Return in Germany

There are many ways to file a tax return in Germany:

1. Hiring a Tax Consultant

• My recommendation is to Google “VLH + your city name” to find help from the Lohnsteuerhilfeverein.
• Their fee depends on your salary, but the minimum starts at €52.

2. Using ELSTER (Free but Complex)

• ELSTER is the official German tax platform.
• It’s free to use but can be overwhelming, especially for beginners (it was for me!).

3. Using Paid Tax Software (Easy & Time-Saving)

• Paid platforms like Wundertax and Smartsteuer simplify the tax declaration process.
• These web apps have stripped-down features compared to ELSTER, making them:
  • Easier to use
  • Less time-consuming

By choosing the right method for your needs, you can make your tax declaration simple, efficient, and rewarding! Hopefully this guide helps you get a Better understanding of Taxes in Germany.

You can head over to my guide on How to File a Tax Return in Germany if you wish to learn more about that.

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Disclaimer: None of the content in this article is meant to be considered as legal or tax advice, as I am not a tax or legal expert and am only sharing my experience. The information is based on my own research and is only accurate at the time of posting this article but may not be accurate at the time you are reading it. Please do your own reasearch and confirm the opinions given in this article.