German income tax – this is what you should know

Navigating German income tax can feel like decoding a foreign language and in Germany, it kind of is. But once you crack the system, you’ll be one step ahead and possibly owe less than you expect.

This guide walks you through what you need to know about the Einkommensteuer (income tax), giving you clear steps, practical tips, and the confidence to handle your taxes without stress.

You will also learn how to pay less taxes, like a local pro.

Feel free to ask questions in the comments section. I answer each question personally.

Bastien – Settle in Berlin

Who is liable for German income tax

German income tax is known as “Einkommensteuer“.

• Anybody living in Germany has to pay income tax here.
• German residents have to declare their income, regardless of its geographical origin.
• It doesn’t matter if you are a German national or a foreigner.
• Whether you are an employee or self-employed also doesn’t play a role.

As a reminder, you are considered a German resident if you spend more than 183 days in the country during any given year. If you aren’t a German resident, you can still be liable for German income tax in some cases. Refer to this section for more details.

Income tax is levied thanks to your German tax ID, which is a unique identifier used by the local tax office (Finanzamt) & your employer.

Which types of income are taxed in Germany

Germany has a detailed tax system that applies differently depending on the nature of your income. If you’re an expat living and working here, it’s essential to know which taxes apply to your specific situation. Let’s break German income tax down clearly:

Income related to self-employment (private Einkommensteuer)

If you are working as a freelancer (Freiberufler) or running a small business as a sole proprietor, you are subject to private Einkommensteuer (personal income tax). This tax applies to your profits after deducting business expenses. You must file an annual income tax return and pay tax on your net earnings. Staying on top of bookkeeping is crucial, as your declared income determines your German income tax.

Income related to employment (Lohnsteuer)

Employees automatically pay Lohnsteuer (wage tax), which is deducted from their gross salary by their employer each month and forwarded directly to the tax office. As an expat working under a German employment contract, this is the most common form of tax you’ll encounter. You might still need to file a tax return if you want to claim deductions or if you have additional income sources.

Income related to pension (private Einkommensteuer)

If you’re receiving a pension, either from Germany or abroad, your pension income is typically taxed under private Einkommensteuer. The amount you must pay depends on when you began receiving the pension and the type of pension it is. Foreigners retiring in Germany should be aware that both state and private pensions could be taxable, often at a progressive rate.

Income related to businesses (Gewerbesteuer)

Running a registered business (such as a GmbH, UG, or a partnership)? You’ll need to pay Gewerbesteuer (trade tax) on your business profits in addition to Einkommensteuer. It becomes relevant once your business exceeds a €24,500 annual profit threshold. This tax is paid to the municipality where your business is located, meaning rates can slightly vary depending on where you are based.

Income related to agriculture and forestry (Gewerbesteuer)

If your income comes from farming, forestry, or related activities, you may also be liable for Gewerbesteuer. However, agriculture and forestry often benefit from preferential treatment in German income tax, for example, lower tax rates and special allowances, to support rural development. Expats entering this sector should seek specialist advice, as the rules can differ significantly from other businesses.

Income related to capital (Kapitalertragsteuer)

Earnings from investments, like dividends, interest, and stock sales, are subject to Kapitalertragsteuer (capital gains tax). In Germany, a flat rate of 25% plus solidarity surcharge and, if applicable, church tax is withheld at the source. If you’re investing while living in Germany, this tax will usually be automatically deducted by your bank or investment provider.

You can read a detailed guide about Kapitalertragsteuer/capital gains tax in Germany here.

Income related to property (Grundsteuer)

Owning property in Germany comes with an annual obligation to pay Grundsteuer (property tax). It’s assessed based on the value of the land and the building on it. If you’re a foreigner investing in real estate, whether to live in or rent out, expect to receive a property tax bill every year from your local municipality. Recent reforms are adjusting how property values are calculated, so rates may change in the coming years.

Income from leasing or renting property (private Einkommensteuer)

If you rent out a property, whether it’s residential or commercial, the rental income you earn is subject to private Einkommensteuer (personal income tax). You must declare the rental income on your annual tax return. Fortunately, you can deduct expenses like mortgage interest, repairs, property management fees, and depreciation from your rental income, reducing your taxable amount. For expats renting out property (especially if you own property abroad but are a German tax resident), careful documentation is key.

Income from inheritance (Erbschaftsteuer)

If you inherit money, property, or other assets while living in Germany, you may be liable for Erbschaftsteuer (inheritance tax). The tax rate depends on your relationship to the deceased and the value of the inheritance. Close relatives like spouses and children benefit from high tax-free allowances (up to €500,000 for spouses). Expats should note that even inheritances received from abroad can be taxed in Germany if they are considered tax residents.

Income from alimony (Unterhaltsleistungen)

Alimony payments, whether received or paid, have specific tax rules.

• If you pay alimony: You may deduct certain alimony payments from your taxable income, reducing your overall tax burden. Expats paying or receiving alimony should clearly document agreements and payments to ensure correct tax treatment.
• If you receive alimony: Normally, alimony is not taxable income for the recipient unless both parties opt for a special arrangement (Realsplitting) where the payer can deduct the payments, making them taxable for the receiver.

Other income types impacting German income tax with the Progressionvorbehalt

Some income in Germany is tax-free but still affects how much tax you pay on everything else. This is called the Progressionsvorbehalt (progression clause). The following benefits fall into this category:

• Unemployment benefits – (ALG 1)
• Social benefits – (ALG 2 /Bürgergeld)
• Parental benefits – (Elterngeld)
• Child benefits – (Kindergeld)
• Maternity benefits – (Mutterschaftsgeld)
• Lottery winnings

You don’t pay tax on these benefits directly. But the Finanzamt adds them to your taxable income to determine your tax rate, then applies that higher rate to your actual taxable earnings. The result: you can end up paying more tax on your salary even though the benefits themselves are untaxed.

Example: You earned €30,000 in taxable salary and received €8,000 in Mutterschaftsgeld. You don’t owe tax on the €8,000. But the Finanzamt calculates your tax rate as if you earned €38,000, then applies that rate to your €30,000. The difference is usually a few hundred euros, not thousands, but it catches people off guard at tax time.

In any case, when your Lohnersatzleistungen (wage replacement benefits listed in the list above) exceed €410 in a calendar year, you are required to file a tax return.

Income tax rates in Germany

German income tax follows a progressive system. This means that each “slice” of your income is taxed a different rate. Your tax burden increase with each bracket you reach, with each bracket applying a different rate. This is what it looks like if you are single:

This is how married couples & registered partners are taxed in Germany, if they do a joint tax declaration.

Please note: those tables are a simplification because there are many sub-brackets. Full table available here.

Employees can calculate their net versus gross salary thanks to this net salary calculator for Germany.

Solidarity & church tax surcharges

To paint a more complete picture, it’s important to look a 2 other factors that can impact your German income tax burden:

• Solidarity tax (Solidaritätzuschlag): this surcharge was initially applicable to all tax payers as way to finance former East Germany after reunification. Since 2021 however, only tax payers with income higher than 96 409€ (single person) are subject to it. Account for an additional 5.5% of your income tax.
  
• Church tax (Kirchensteuer): Germany is financing several mainstream churches directly through this surcharge. This is applied to the tax payer if they are part of one of them. Account for an additional 8-9% of your income tax. You can find a guide on how to stop paying Church tax here.

Please note that those surcharges are not calculated off of your total taxable income, but only off of your taxes to be paid.

When is German income tax due

As a private person, income tax in Germany is levied at different times:

• For employees: Wage tax (as well as solidarity & church tax) is levied directly by your employer on your paycheck at the source. Factors impacting that taxation are factored in: family status & tax classes for example. This means that your net salary is also your net income after taxes. All taxes on other income sources you might also have (rental income, capital gains, etc) are to be declared in your yearly tax return. They are then due on the year following by July, 31st. (eg: tax on income from 2024, to be paid in 2025), or later with a tax consultant.
  
• For self-employed: if you are a newly established freelancer in Germany, income tax is usually due the year after your first year of activity, based on tax assessment for that year. In the years after that, the Finanzamt will use that data to set quarterly prepayments. This is adjusted every year based on your financial results. As for employees: any tax due on other income sources are to be declared in yearly. They are then due on the year following by July, 31st (eg: tax on income from 2024, to be paid in 2025), or later with a tax consultant.

Taxation for foreigners

German income tax for non-residents

There are cases in which non-residents also need to pay income tax in Germany, albeit in a limited capacity on this particular type of income:

• Non-residents owning real estate in Germany: they have to pay property tax (Grundsteuer) on the rental income they get from their local investments. There is an obligation to submit a tax return every year. The local tax authorities (Finanzamt) might decide on prepayments throughout the year in form of quarterly installments.
• Public servants sent abroad: if you are on the payroll of a public entity while working abroad, your income is to be taxed in Germany.
• Non-resident employees of a German company: they have to pay tax on so called extraordinary income (außerordentliche Einkünfte as defined by § 2 Paragraph 1 of EStG). This is things like stock-options, severance packages, capital gains & bonuses. There is an obligation to submit a tax return too.

Avoiding double taxation

Numerous bilateral treaties exist between Germany and countries around the globe to ensure a fair taxation for citizens working across borders. Those treaties plan for relief mechanisms to avoid both countries apply income tax twice.

You can read how to use double-taxation avoidance agreements in this post.

How to lower your taxable income

There are few things you can do to pay less taxes:

• Get married: The German tax code is generous with families. It plans a tax relief system that’s particularly interesting if either one of you earns more than the other. This is controlled by your tax classes (Steuerklasse). How to make use of tax classes is explained here. You can potentially save thousands of euros that way.
  
• Have kids: Parents can benefits from tax relief when they have children. This is called a child allowance (Kinderfreibetrag), which is connected with child benefits (Kindergeld) in the overall calculation. In 2026, that amounts to 6,828€ per kid, as defined by Einkommensteuergesetz (EStG) § 32. A lot of expenses related to your kids can be put off in taxes too (such as expenses for school or day care).

• Make use of tax-deductible expenses: there are plenty of expenses that can be put off in taxes. You can find a list of deductibles for Germany this way.
  
• Do a tax return every year: even if it’s not compulsory to make a tax declaration (Steuererklärung) every year for a lot of people, it’s often well worth because of how much taxes you can get back. Here is a guide on how to do a tax return in Germany.

German income tax – FAQ

I hope this overview was a helpful introduction on the topic. Feel to ask questions in the comments.

Bastien

Sources & references

• Amt24 Sachsen. “Einkommensteuer.” Amt24 Serviceportal, https://amt24.sachsen.de/zufi/lebenslagen/5000064. Accessed April 28, 2025.
• WTS Global. “Germany: Taxation of Global Mobility.” WTS Global, published March 16, 2021, https://wts.com/global/publishing-article/20210316-germany-gmnl~publishing-article?language=en. Accessed April 28, 2025.
• Wikipedia contributors. “Taxation in Germany: Income tax for non-residents.” Wikipedia, The Free Encyclopedia, https://en.wikipedia.org/wiki/Taxation_in_Germany#Income_tax_for_non-residents. Accessed April 28, 2025.
• Finanztip. “Kinderfreibetrag: Für wen er sich lohnt und wie viel er bringt.” Finanztip, https://www.finanztip.de/kinderfreibetrag/. Accessed April 28, 2025.
• Organisation for Economic Co-operation and Development (OECD). Taxing Wages 2021: Full report. OECD Publishing, https://www.oecd.org/en/publications/taxing-wages-2021_83a87978-en/full-report.html. Accessed April 28, 2025.