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What is "income tax" and how is the tax base for calculating income tax determined?

The subject of income tax is the income of natural persons. Income tax is generally levied on certain income through tax deductions (e.g. wage tax and capital gains tax).

Income tax is levied on income

  • from agriculture and forestry
  • from trade and business,
  • from self-employment,
  • from non-independent work,
  • from capital assets,
  • from renting and leasing as well as
  • the other income specified in § 22 EStG (e.g. income from a pension from the statutory pension insurance or from a private funded pension insurance or income from private sales transactions).

Income is profit in the case of agriculture and forestry, business operations and self-employment. The profit is to be determined by means of a comparison of business assets or as the surplus of business income over business expenses or - in the case of smaller agricultural holdings - according to average rates. Operating expenses are those expenses which are caused by the business or the self-employed occupation. In the case of the other types of income, all expenses which are intended to acquire, secure and maintain the income (income-related expenses) are to be deducted from the income from the respective type of income in order to determine the income. Expenses for living (regularly e.g. expenses for food, clothing, housing) may not be deducted as business expenses or income-related expenses. This also applies to such expenses that your economic or social position entails, even if they further your profession or occupation.

In order to determine the sum of income, positive and negative income within one type of income and, in addition, between the individual types of income may be offset without restriction. Negative income from loss allocation models may only be offset against positive income from such models.

The following amounts are deducted from this sum of income if the legal requirements are met:

After deducting the above-mentioned amounts, the total amount of income remains.

In order to determine the income, the following amounts are to be taken into account in a reducing manner under certain conditions:

  • Loss deduction (loss carried forward, loss carried back)
  • Special expenses (e.g. pension expenses, church tax, childcare costs, expenses for own vocational training, school fees, maintenance payments to the divorced or permanently separated spouse/life partner, donations)
  • Extraordinary burdens (e.g. medical expenses, maintenance expenses and expenses for vocational training, lump sums for disabled persons, surviving dependents and caregivers)

The last step in determining the taxable income is to deduct any child allowances from the income.

The taxable income determined in this way forms the assessment basis for the standard income tax. The standard income tax, reduced by the domestic and, if applicable, foreign taxes to be credited and possibly further tax reductions (e.g. in the case of expenses for household-related employment/services), increased by certain amounts, is the income tax to be determined.

If the tax-free allowances for children are deducted from the income because this deduction from income tax is more favourable than the child benefit, the child benefit is added to the income tax to the corresponding extent.

The advance income tax payments made for this year and the withheld wage tax and, if applicable, capital gains tax are credited against the income tax assessed. If the settlement results in a surplus to your disadvantage, you must make this amount as a final payment. If there is a surplus in your favour, this amount will be refunded to you.

Legal basis:

  • § Section 2 of the German Income Tax Act (EStG)
  • § 4 paragraph 1 in conjunction with § 5 EStG
  • § 4 paragraph 3 EStG
  • § 4 paragraph 4 EStG
  • § 10 EStG
  • § 10d EStG
  • § 12 EStG
  • §§ 13, 13a EStG
  • § 24a EStG
  • § 24b EStG
  • §§ 31, 32 EStG
  • §§ 33, 33a EStG
  • § 36 paragraph 2 EStG


You can also find more information on VAT in the "Tax tips" and "Brochures" provided by the Ministry of Finance Baden-Württemberg under "Publications".

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