Tax Advantages for Families: A Quick Overview
We all know that having children leads to tons of extra expenses – such as simple childcare costs, to clothing, to extracurricular activities. Parents in Germany can deduct many of these costs from their taxes and benefit from some additional tax advantages. Learn more in this article!
1. Change your tax class before taking parental leave
Parents should plan early to take full advantage of their tax benefits. Before your child arrives, you should check whether changing your tax class (Steuerklasse) could be beneficial – in concrete terms, whether it would be worthwhile for the parent taking parental leave from work to switch from tax class V or IV to tax class III. Parental allowance is based on your net earnings for 12 months prior to your child’s birth, and with tax class III, employees receive higher net income resulting in higher parental allowance during your leave.
Take caution: This method doesn’t always pay off and is typically only beneficial if the parent taking leave earns more than the minimum amount. Couples should calculate in advance whether the tax class switch is beneficial for them and must be married to receive this advantage.
There is another downside to this: To benefit from this method, the couple/spouse must change their tax class at least 7 months before parental leave begins meaning it has to take place shortly after you find out about the pregnancy.
2: Claiming child benefits or allowances
Parents are typically entitled to child benefits (Kindergeld) or child allowances (Kinderfreibetäge). Child benefits consist of a monthly pay-out while child allowances reduce your deducted taxes. To receive such benefits, parents can submit an application to their local family benefits office.
Child benefits currently amount to 219 euros per month for your first and second children, 225 euros for the third and 250 euros for each additional child. These can be claimed until your child is 18 years of age unless they are receiving an education or in need of care in which case they could be claimed longer.
When you submit your tax return to the tax office (Finanzamt), they will check automatically check whether child allowances or benefits make more sense for your family financially and which one is more advantageous for you. The general rule of thumb is that child allowances are more worthwhile for married couples with a yearly income of around 60,000 euros or single people with an income around 30,000 euros. As with many other tax breaks, married couples with children generally benefit more from child allowances.
3. Claiming your health & nursing care insurances as tax expenses
If your child is entitled to child benefits or allowances you can claim their health and nursing care insurances as special expenses (Sonderausgaben) on your tax return. The same amount can be deducted if the child is co-insured with a parent or is the policyholder themself.
4. Deducting childcare costs
Two-thirds of your childcare costs, or up to 4,000 euros, can also be claimed on your tax return. The child in question must be a maximum of 14 years old unless they are unable to care for themselves and need constant care.
Costs for music or sports lessons, leisure activites, meals, or tutoring are not considered childcare costs. Care provided by your relatives, however, can be deducted under certain circumstances. If you plan to deduct childcare costs from your tax return, you should hang on to any proof of the expenses in case the tax office requests it. Payments made in cash cannot be claimed – they must have been via bank transfer or a method that can be tracked and proven.
5. Relief for single parents
It can be very difficult for single parents financially when compared with married couples with children. To help combat this, single parents can deduct 4,008 euros per year from their income tax for their first child (previously 1,908 per year) plus 240 euros per month for each additional child. The parent claiming the relief must live with their child in their household and be entitled to child benefits or child allowances.
Single parents should apply for tax class II so that their relief amount is already taken into account in their monthly wage deductions. If one has several children, an application for wage tax reduction can be submitted to their local tax office to claim the supplement relief amount. Relief contributions can also be simply declared on your tax return.
6. Claiming education allowances
If you have children who are currently undergoing vocational training, long-term internships, or pursuing a degree, you can claim educational allowances provided that certain circumstances are met. This allowance can also be claimed if your child is participating in language study trips, training as a teacher’s assistant, etc.
To claim this allowance, your child must be of age and eligible for child benefits or allowances. They must not live at (their parents’) home but can reside both in Germany or abroad, with other relatives, in boarding school, etc. The deciding factor is whether your child lives independently and in a separate household from the parents.
Education allowances can be entered into the child form (Anlage Kind) of your tax return. This allowance currently amounts to 924 euros per calendar year. Any income your child receives during their education or training is irrelevant to the allowance.
7. Allowances for those with Riester pensions
Parents with Riester pensions can benefit from state subsidies provided that their child allowances are renewed each year. If both parents have a Riester pension, only one can claim the allowance – generally, the parent who earns less. This allowance amounts to 300 euros per year for children born after 2008 and 185 euros per year for children born before 2008. This allowance can be claimed as long as the child is eligible for child benefits/allowances. In addition, contributions to Riester pensions can also be claimed on your tax return.
Families can benefit from many different tax advantages, but often don’t due to simply not knowing about them. Those who wish to benefit from these tax advantages should find out as soon as possible which amounts can be deducted and which reliefs they are entitled to. While raising children, even with tax advantages, remains expensive – these tips can definitely help lessen the load and provide financial relief.