With regard to expenses of a provident nature, a distinction is made between contributions towards basic old-age provision and other provident expenses (section 10 subsection (1) number 2 in conjunction with subsection (3) or section 10 subsection (1) number 3 and 3a in conjunction with subsections (4) and (4a) of the Income Tax Act).
Contributions towards basic old-age provision are:
- Contributions to the statutory pension system,
- Contributions to the agricultural pension funds,
- Contributions to the pension schemes for the free professions which provide benefits comparable to those of the statutory pension insurance,
- Contributions to (private) pension agreements, the entitlements from which may not be used as collateral security, transferred by succession, ceded, sold or capitalised. Such insurance may only be paid out in the form of a monthly annuity for life and may not be paid before the age of 62 (and not before the age of 60 in the case of contracts concluded before 1 January 2012). Additional insurance cover may be taken out for surviving dependents or occupational disability/impairment of earning capacity.
All contributions to the above-mentioned forms of insurance (including the employers’ share of the contribution in case of employees required to take out pension insurance) are deductible up to a specified maximum amount. From the 2015 assessment period onwards, this maximum deductible amount is index-linked with the maximum contribution to the miners’ pension insurance system (West). For 2015, the maximum deductible amount is €22,172 (or €44,344 for married couples/civil partners who are assessed jointly1). For a transitional phase up until the year 2025, only a certain percentage of the relevant amounts will actually be deducted. From 2005 onwards, 60% will be deducted. This tax-free portion of pension costs will increase by 2 percentage points a year until it reaches 100 percent in 2025.
Rules on the deductibility of other provident expenses were revised as of 1 January 2010 under the Citizens Relief Act (Bürgerentlastungsgesetz). Until 2009, other provident expenses could be taken into account for tax purposes up to an amount of €2,400 or €1,500. These limits on deductions were both raised by €400 as of 1 January 2010, to €2,800 and €1,900 respectively. The €1,900 limit applies to taxpayers who, bearing none or part of the expense themselves, are entitled to a full or partial reimbursement of medical expenses or for whom certain tax-exempt payments are made towards their health insurance. Examples of such taxpayers include employees covered by compulsory insurance; civil servants; and old-age pensioners under the statutory pension insurance scheme who have compulsory statutory health insurance. All other taxpayers, that is, individuals who must pay the entire cost of their health insurance themselves, may deduct up to €2,800 of other provident expenses as special expenses. Spouses who file a joint tax return may each claim the respective deduction separately.
Other provident expenses besides contributions made to health insurance and to long-term care insurance include, e.g., contributions made to unemployment insurance, to occupational invalidity insurance and to accident or liability insurance. These expenses can be deducted up to the applicable limit.
A special rule applies to contributions to basic health insurance (offering a level of protection equivalent to that provided under social welfare assistance) and statutory long-term care insurance (social insurance for long-term care and private long-term care insurance covering the compulsory requirements). If the amounts of the contributions made for these purposes exceed the above-mentioned limit (of €1,900 or €2,800) applicable to other expenses of a provident nature, these amounts at least are tax-deductible as expenses of a provident nature. However, it is not then possible to deduct any further costs for other expenses of a provident nature. In other words, if a taxpayer who, bearing none or only part of the contributions himself, is entitled to complete or partial refund or assumption of healthcare costs and spends more than €1,900 on his contributions to basic health insurance and to statutory long-term care insurance, he can claim the full amount as a tax deduction. The amount is not capped. Not all health insurance contributions are considered to be for basic insurance. Some examples of contributions, or parts of contributions, that are not for basic insurance include those that finance the following: sick pay, daily insurance payouts in case of illness, and the provision of optional extras such as treatment by a consultant or a single-bed room.
To ensure that the amendments made to the law in the past do not disadvantage anyone, the amounts each individual would be able to deduct from tax under the old law (prior to 31 December 2004) and under the new law are compared for the years 2005 to 2019, as provided for under the 2009 law. The more favourable variant for the taxpayer is then used in each case.
From the 2010 assessment period onwards, a flat-rate allowance for provident expenditure will only be available in the wages-tax calculation (see also the section on wages tax). No flat-rate allowance for provident expenditure is taken into account in the income tax assessment.
Riester incentives are available to those who are affected economically by the lowering of pension levels under the 2001 reform of pensions and pension benefits and who continue to actively participate in the relevant old-age pension system (particularly those for whom membership in the statutory pension insurance system or the farmers’ pension insurance scheme is mandatory, as well as civil servants and persons treated as such). They consist of an additional special expenses deduction for contributions to certain old-age pension products, complemented by a supplement that is independent of tax bracket. The old-age pension supplement comprises a basic supplement of €154 plus (a) child supplement(s). The recipient of child benefit – the mother in the case of married parents, or, upon application, the father – is entitled to the child supplement of €185 for children born before 2008 and €300 for children born in or after 2008. Payment of the full old-age pension supplement requires a minimum own contribution (of 4% of the relevant income and no more than €2,100). If the own contribution is lower, the supplement is reduced accordingly. If the own contribution is lower, the supplement is reduced accordingly. As part of the income tax assessment, the tax office reviews whether it is more favourable for the taxpayer to receive a special expenses deduction of up to €2,100 or the supplement. If the special deduction offers greater tax advantages than the supplement, the additional special expenses deduction is granted. In certain cases (i.e. indirect eligibility for the supplement), the special expenses deduction is increased to a maximum amount of €2,160.
Maintenance payments of up to €13,805 to a divorced or permanently separated spouse/civil partner may be deducted as special expenses (section 10 subsection (1a) number 1 of the Income Tax Act). From the 2010 assessment year onwards, the maximum deduction of €13,805 is increased by the amount the payer of maintenance pays towards the basic health and statutory long-term care insurance of the divorced or permanently separated spouse/civil partner (1). For the recipient, the maintenance payments count as other income and, as such, are subject to income tax (section 22 number 1a of the Income Tax Act). This situation is known as limited real income splitting. This procedure must be applied for by the taxpayer making such payments, the application requiring the consent of the recipient.
Donations (gifts and membership contributions) serving charitable, benevolent or religious purposes or for the benefit of political parties within the meaning of section 2 of the Political Parties Act may be taken into account as special expenses, subject to fixed maximum limits. Membership contributions are not eligible for deduction if they are paid to institutions which are involved in the advancement of sport, cultural activities (if these primarily serve the purpose of leisure), local heritage and traditions, or, for example, the rearing of animals or cultivation of plants, or traditional customs.
Donations are deductible up to an amount equivalent to 20% of the donor’s adjusted gross income or up to four-tenths of a percent of the total revenue and the salaries and wages paid in the calendar year. When donations exceed this ceiling the residual amount is deductible in the subsequent assessment periods. Under section 10b subsection (1a) of the Income Tax Act, donations made to the capital reserves of foundations for the purpose of promoting tax-privileged purposes may, upon request by the taxpayer, be deducted for the current assessment period and the following nine assessment periods. These deductions may total up to €1 million in addition to the above-cited maximum deductions. Capital reserve donations that are not used within the ten-year deduction period under section 10b subsection (1a) of the Income Tax Act are shifted into a “donation carry-over” (Spendenvortrag) that is not subject to time limits under section 10b subsection (1) of the Income Tax Act. The maximum deductible amount of €1 million may be claimed only once within the ten-year period.
Special maximum limits apply to donations and dues to political parties. In addition, donations and dues to political parties and independent electoral associations attract tax relief under section 34g of the Income Tax Act amounting to 50% of these expenses, but not exceeding €825 in case of individual assessment or €1,650 in case of joint assessment. Besides this, donations to political parties within the meaning of section 2 of the Political Parties Act may be deducted as special expenses insofar as tax relief under section 34g of the Income Tax Act has not already been claimed for this. This additional deduction is limited to €1,650 per annum in case of individual assessment and €3,300 per annum in case of joint assessment.
Expenditure for the support and occupational training of children is taken into account in the family benefits system by the provision of a tax-free child allowance and an allowance for the minding and education or training needs of children, or by child benefits. This ensures tax exemption equivalent to the subsistence income and the minding and education or training needs of a child as stipulated in the constitution. To the extent not required for this purpose, child benefit serves to promote the family.
In the case of a married couple who are subject to unlimited tax liability and do not live together, child benefit is granted primarily to the parent who has care of the child. Each parent will be granted half of the tax-free child allowance and, if applicable, of the minding and education or training needs allowance. This will be set off in each case against half of the child benefit. However, one parent may receive the full tax-free child allowance if he or she essentially fulfils the obligation to support the child for the calendar year whereas the other parent fails to do so. This also leads to the transfer of the minding and education or training needs allowance. Apart from the requirements for the transfer of the child allowance, one parent may apply for the transfer of half of the other parent’s minding and educational or training needs allowance if the under-age child is not registered as living with that parent and that parent does not provide any child-minding services.
Extraordinary financial burdens of a general nature are deductible where taxpayers are forced for legal, moral or factual reasons to incur expenditure (e.g. as a result of ill health), insofar as such expenditure exceeds the burden they may reasonably be expected to bear themselves (graduated according to income and family status).
Subject to certain conditions, expenditure for the support and vocational training of another person may be deducted to a limited extent as an extraordinary financial burden.
For children under 14 years of age and children who are unable to support themselves because of a physical, mental or psychological disability that arose before their 25th birthday, two thirds (and no more than €4,000) of childcare expenses may be deducted per child as special expenses; this deduction may be made as of the 2012 assessment period. Since that time, the previously permissible deduction as work-related expenses or business expenses no longer applies (section 10 subsection (1) number 5 of the Income Tax Act).
To promote households as employers or customers of services, tax relief is granted on expenses for employment and services in and around the household, as well as for tradesmen’s services (section 35a of the Income Tax Act). Nursing and other forms of care services are also promoted. The tax relief is as follows:
- For part-time, low-wage employment in or around the household (known as mini-jobs): 20% of the expenses, up to a maximum of €510 a year;
- For other employment (employment subject to social security contributions) in or around the household, or for services commissioned in or around the household, other than tradesmen’s services, but including nursing and other care where appropriate: 20% of the expenses for the work, up to a maximum of €4,000 a year;
- For tradesmen’s services commissioned: 20% of the expenses for the work, up to a maximum of €1,200 a year. Government-supported measures for which low-interest loans or tax-free subsidies are claimed are excluded from this tax relief.
Evidence of the expenses must be provided. The tax relief for employment and services in and around the household and for tradesmen’s services is only granted if the taxpayer has received an invoice for the expenses and the payment has been made to the account of the person who performed the services. In the case of low-wage, part-time employment, evidence can be provided in the form of the annual statement from the Minijobzentrale, the central agency in charge of administering these jobs. If the employment in or around the household is subject to social security contributions, where the general system for reporting and paying these contributions applies and wages tax is charged on either a flat-rate basis or in accordance with the information on the wages tax card provided, the general rules for providing evidence apply.