Meaning of Income Tax Brackets

Employees earn income. The state levies income tax on this. This is determined on the basis of the tax tables. The set of rules is adapted to the personal circumstances of the employee and divided into six different wage tax brackets.

There are differences between lump sums and tax exemptions within the individual income tax classes. This subdivision makes it easier for the employer to deduct income tax. In certain circumstances, income tax brackets can be changed. Below you will find out which wage tax classes there are, which groups of people they belong to and how the wage tax class can be changed.

Definition: income tax brackets

Income tax brackets are defined in order to be able to determine the deduction of income tax, solidarity surcharge or church tax on income from non-self-employed work . The Income Tax Act defines six different wage tax classes. Affiliation is usually made dependent on marital status.

Income tax brackets have existed since 1934, when the Tax Adjustment Act was passed. In 1977 the tax code followed the expired law.

All income tax payers are assigned an income tax class. All employees with a place of residence or habitual abode in Germany are subject to income tax. Those who do not have an income tax class are classified in income tax class VI. This is the most expensive and most unprofitable option for the employee.

What are the wage tax brackets?

In the following we present the six wage tax brackets:

Income tax class I

The amount of the monthly wage tax to be paid depends on the wage tax class. Income tax class I includes the fewest allowances. There is an employee lump sum of 1,000 euros, a special lump sum of 36 euros and the income-related pension lump sum.

The basic tax-free amount is adjusted annually and was 9,000 euros in 2018. Those who belong to income tax class I cannot transfer the tax exemptions to a higher-income unmarried partner. Likewise, no child allowances can be claimed.

Income tax class II

Income tax class II is similar to tax class I. One difference is the higher tax exemptions, which reduce the annual tax burden. Tax class II includes the annual tax relief amount of EUR 1,308 due to single parents.

Income tax class III

The tax burden remains the lowest in income tax class III. This tax bracket can be chosen by married couples. However, she can only choose one spouse, while the other opts for income tax class V. The allowances of both spouses are recorded in income tax class III. The spouse classified in tax class V waives the benefit.

Income tax class IV

This wage tax class is available to married employees who are classified in wage tax class III. They can choose whether they use the combination of classes III and V mentioned above or whether they can both be classified in income tax class IV. The basic allowances are granted to both spouses separately. Both parties also benefit from the employee lump sum, the special expenses lump sum and the income-related pension lump sum.

Income tax class V

Wage tax class V is reserved for married people and is considered a pedant to tax class III. Employees classified in tax class V cannot claim a child allowance or a basic allowance. The employee lump sum, the special expenses lump sum and the pension lump sum apply. In addition to income tax class VI, tax class V is rather unfavorable and unfavorable for the taxpayer.

Income tax class VI

There are differences in income tax class VI to the previous tax classes. This tax bracket is indicated if the employee needs another income tax card because he is doing other jobs. The income tax class VI includes the presence of another tax class, which is issued for the first employment relationship. Tax class VI also applies to secondary employment and marginal employment of pensioners or students.

The affiliation to the individual income tax brackets at a glance

Income tax class Affiliation
I. single workers
II single workers with children
III married workers whose partner does not have an income-related job
IV married workers both of whom have paid employment
V. married employee whose partner has chosen income tax class III
VI Employees who are employed by several employers are
retirees or young people who have a part-time job

What is the significance of the choice of wage tax bracket?

Normally, you will automatically receive your correct tax bracket. As already made clear, the marital status is decisive for this. There are various options for spouses to change their income tax brackets and benefit from them. We will go into this in more detail below.

The choice of tax class ultimately determines the amount of the taxes to be paid to the tax office. Allowances can reduce this amount. The tax rate is determined based on your income.

Nevertheless, you do not need to worry about paying too much taxes permanently because you are classified in a “bad” income tax bracket. You can claim back the overpaid taxes on your next income tax return.

Income Tax Brackets