What income is exempt from tax?

The sometimes most general answer to this question could be: In principle, all income must be taxed. However, if you take a look at the details, you automatically get a much more extensive answer to the initial question. This article reveals all the information about which income is now tax-free.

Figure 1: Anyone who generates income and "pockets" this income without paying taxes is liable to prosecution, because after all, the majority of types of income are subject to income tax.

A look at the Income Tax Act shows these types of taxable income

What kind of income is taxable and what is not has nothing to do with the level of income. Instead, the Income Tax Act regulates which types of income are taxable and which are not.
the Income tax are therefore subject to income

  • from capital assets, such as interest and share sales,
  • a trade
  • Forestry and agriculture,
  • Pensions (company or statutory body),
  • independent and non-independent work
  • as well as from leases or rentals.

“Other income” that is recurring is also taxable. That means: Income from maintenance payments, pensions for members of parliament or remuneration from old-age provision contracts must also be declared and taxed as income.

These are the two biggest misconceptions about income taxation
The popular opinion is that everything you get has to be taxed. In fact, this is not always true, as there are two exceptions:

  • Gifts and inheritance fall under the inheritance tax law

It is correct that this list does not include income from gifts or inheritance, but that it is taxable. It is still true that they cannot be found in the first list, because gifts and inheritances are NOT subject to income tax, but to inheritance and gift tax. How high the taxes are that arise when someone receives a gift or inheritance depends on the degree of kinship. In this context, spouses and registered partners benefit from the highest tax allowance under Section 16 of the Inheritance Tax Act. Inheritance and gifts in the amount of 500,000 euros remain tax-free. In addition, these allowances apply:

  • For children, the tax exemption is 400,000 euros.
  • For grandchildren, the tax exemption is 200,000 euros.
  • For parents / grandparents, the tax exemption is 100,000 euros
  • In all other cases of inheritance or donation, the tax exemption is 20,000 euros.
  • There is no income tax on winnings from the gambling sector

The second common misconception benefits taxpayers who are otherwise often asked to pay, because anyone who has ever been lucky in the lottery knows that winning the lottery is tax-free. This could mean that one of the largest incomes of all could be exempt from income tax, because: Whoever wins can win millions and gets these transferred tax-free.

The other side of the coin: this income is tax-free

Even if it must have sounded as if almost every cent is taxable up to now, this is not the case in practice. There is also a number of income that can simply be “kept” tax-free.

Attention: From a purely tax point of view, a distinction must be made between completely tax-free income and income that is subject to the so-called progression proviso. Common examples of this are benefits such as parental and unemployment benefits, so-called short-time work benefits, and nursing and sick pay. The tax detour of the progression proviso at this point means that the income itself is not taxable, but it is reflected in the tax rate that applies to all other income that is taxable. In practice, this can mean that taxes are paid by the Progression reservation have to be paid back. On the other hand, negative progression reservations are also possible, which can reduce the tax burden.

In addition, various tax exemptions apply, which can be understood as the maximum degree of tax exemption. Everything that is higher than this is then taxable.

Despite all these restrictions, the Income Tax Act still provides for income that is completely exempt from tax liability. Those who receive the following cash benefits do not have to pay tax on this income:

  • Unemployment benefit
  • BAföG and other benefits in accordance with the Training Assistance Act
  • Parental allowance
  • Childcare allowance
  • Financial compensation for volunteer work
  • Cash benefits from accident, health and long-term care insurance
  • Child benefit
  • Wage replacement benefits
  • Maternity allowance
  • social care
  • Housing benefit
  • Surcharges paid for work at night, on Sundays and public holidays
  • Subsidies for old-age provision (private and corporate)

Chapter 2 of the Income Tax Act is devoted to “tax-free income”. If you want to read exactly which income is taxable and which is not, you can read the details in Paragraph 3.

Image sources:
Figure 1: pixabay.com © Alexas_Fotos (CC0 Public Domain)
Figure 3: pixabay.com © Hermann (CC0 Public Domain)