Any expatriate living within German borders will be subject to German taxes, particularly German Income Tax, especially if they have sourced German income. The tax system in Germany is similar to other structures from other countries within the EU (European Union). You will pay tax on income throughout the year, with employers deducting each pay packet of the relevant taxes. Adjustments are made at the very end of the year to distinguish whether an individual has underpaid or overpaid tax in relation to German income tax.
German Income Tax: Deductions
Just as other EU countries, Germany allows deductions of various amounts, which can lower taxable income. Tax deductions are granted under circumstances where the government deems appropriate. Examples for such include child benefit for children under the age of 18 (or under 27 years of age if in full time education without earnings), specified insurance premiums, political contributions, charitable contributions (these contributions need to go to German entities) up to a certain limit and unavoidable extraordinary expenses above a set limit (such as suffering from illness).
Deductions from compensation are also made for four social aspect programs. These are retirement, unemployment, insurance for health and long term nursing care. The employee and the employer usually take payments towards these programs equally.
The share of which the employer is accountable is not considered a taxable income amount to the employee; the employee’s section is deductible up to a certain limit.
If an individual is subject to tax in Germany, most sources are generally taxable on income. The wage tax (Lohnsteuer), which counts for nearly a third of the German Governments entire revenue, is actually held at source from compensation. Other sources of income are covered by income tax (Einkommensteuer). Other sources of income include self-employment, fees charged for a service, collection of rents and investments.
The wage tax and the income tax differ in the way that they are both collected. The wage tax is collected at source and paid to the tax office while the income tax must be paid by the individual himself or herself.
The tax rates for 2014 resulted in 0% being taxable up to €8,004 with 14% then taxable up to €52,881. 42% is taxable up to €250,730 and 45% on wages over €250,730.