If you’ve generated income from capital gains (Kapitalerträge) on financial investments such as dividends, stock sales, funds or certificates, or interest on savings accounts, you’ve probably noticed some of this income is funnelled away from your bank account each month for taxes.
Withholding tax (Abgeltungsteuer) has been due on capital gains since 2009. This tax is a form of income tax which is immediately deducted from the income as soon as it arrives (Quellensteuer); however, there is a way to reduce the amount deducted from your capital gains.
A Brief Note about Withholding Tax
Withholding tax amounting to 25% must be paid on capital income and if applicable, church tax and solidarity surcharges as well.
You don’t have to take any action to pay the tax due on capital gains, it is automatically deducted from the income (similar to wage tax) – and transferred to your local tax office (Finanzamt) by your bank. For example, if you have a savings account, you will receive an annual overview of the income and interest you’ve received. If the interest is subject to withholding tax, 25% of it will be automatically transferred to the tax office.
Utilize the “saver’s allowance” to reduce taxes
The “saver’s allowance” (Spararpauschbetrag) is a tax-free allowance for income tax purposes. For single people, this is 801 euros and for married couples, 1,602 euros.
Private investors can benefit from this. If they apply for the saver’s allowance, the first 801 (or 1,602 if married) euros of their capital income will not be subject to tax. Only the earnings that exceed this amount will have a withholding tax deducted from it.
How to apply for the saver’s allowance
You can apply for the saver’s allowance using an exemption order (Freistellungsauftrag) at your bank. The tax-free amount of 801 euros (1,602 if married) can be split between several different accounts.
You can generally find and fill out the application for an exemption order on your banks homepage online.
If applying for the saver’s allowance with an exemption order, keep this things in mind:
- You must provide your tax ID
- Exemption orders are valid for one year and can only be cancelled from December 31st
- Exemption orders can be issued for an unlimited period
- Exemption orders can be changed at any time
- Spouses can use joint or separate exemption amounts
If you’ve paid too much tax..
If you didn’t know about the saver’s allowance and instead paid tax on your full capital income, you could’ve lost a good chunk of money that you wouldn’t have paid with an exemption order. For example:
- You had 1,500 euros from dividends and interest
- If you didn’t make an exemption order, 25% of the full amount is taxed
- 375 euros of that amount is withheld
- With an exemption order, only the amount above 801 euros (if single) is taxed. - 1500 – 801 = 699 euros of taxable income
- 174.74 is withheld (25% of 688) instead of 375.
Unfortunately, the saver’s allowance cannot be granted retroactively, but excess taxes paid can be reclaimed on your income tax return (Einkommensteuererklärung).