Parental allowance and income tax declaration
07.07.2020
During parental leave, money is often tight. Many parents try to keep the monthly income as high as possible. It is not uncommon for the working partner to switch to the most favourable tax class 3, but what helps at first can turn out to be a costly mistake later on.
This article explains the effects of parental allowance on income tax. In another article you can read how you can get a higher parental allowance by changing tax class.
- ✔ Anyone who receives more than €410 parental allowance in a calendar year must submit an income tax declaration.
- ✔ Parental allowance is tax-free, but increases the average tax rate when submitting the income tax declaration.
- ✔ Parental allowance is entered on the cover sheet of the income tax declaration (line 38)
- ✔ The Parental Benefit Authority has already notified the tax department of the actual amount of your parental allowance received in the calendar year (electronic data transfer)
- ✔ The less taxable income in a calendar year, the weaker the progression effect.
- ✔ Parents who are assessed together, where one earns very well and the other has a high parental allowance, are particularly "hard" hit.
- ✔ Put money aside for the tax back payment if the working parent has the salary taxed with income tax class 3 during the partner's parental leave.
- ✔ Have your tax liability calculated early so that you don't have any "nasty surprises".
- ✔ The inflow principle applies to progressive income. If you start drawing parental allowance around the turn of the year, plan carefully in which year it is wiser to receive the first (subsequent) payment of parental allowance..
- ✔ It can make sense to spread the inflow of parental allowance through Parental AllowancePlus over several tax assessment periods in order to reduce the progression effect
Is parental allowance subject to income tax?
No, it is even explicitly tax-free, see § 3 No. 67 lit. b) Income Tax Act. This means that the parental allowance is transferred 1:1 from the parental allowance office without tax deductions.
But: According to § 32b Abs. 1 S. 1 lit. j) Income Tax Law, the parental allowance is subject to the so-called progression proviso.
The progression proviso refers to a special calculation process in income tax calculation, in which tax-free benefits indirectly increase the tax rate on taxable income.
This can best be explained using a simple example:
Your taxable income in 2019 is EUR 50,000. The tax rate is (approximately) 25%, and income tax is therefore EUR 12,300. Now the tax department will check whether you have received so-called progression benefits (parental allowance, maternity allowance, sickness benefit, unemployment benefit I, etc.) this year. Let us assume that you have received 10,000 EUR parental allowance. Your "fictitious" taxable income is now 60,000 EUR, the tax rate would be approx. 27%.
Now this (higher) tax rate is applied to your originally taxable income. So for 50.000,- EUR there is now a tax rate of 27% instead of 25%. The income tax increases due to the parental allowance by 1.200,- EUR to 13.500,- EUR.
The effect of the parental allowance in this example is therefore 1,200 EUR.
parental allowance in the income tax declaration
Like other income replacement benefits subject to the progression clause (ALG I, maternity benefit, sickness benefit, short-time working allowance, etc.), parental allowance is entered in line 38 of the jacket sheet of the tax declaration, separated according to recipient and type of benefit.
The parental allowance authority has already sent the tax department the amount of your parental allowance electronically. If you participate in the retrieval procedure of the electronic data, you can automatically transfer the parental allowance to the correct line.
Tip: Normally, the employee lump sum of €1,000 is deducted from the parental allowance, which reduces the progression effect and effectively saves taxes.
However, the tax department does not currently deduct this lump sum if higher income-related expenses than €1,000 have already been deducted from taxable income from employment income.
A constitutional complaint has been lodged against this. It is currently pending before the Federal Constitutional Court under the file number 2 BvR 3057/14. We recommend that the appeal be lodged for all affected assessment periods in order to have the lump sum deducted from the parental allowance in these cases as well. Last but not least, this is necessary to ensure equal treatment with self-employed persons, for whom all business expenses are regularly taken into account to reduce taxes and the lump sum is also deducted from the parental allowance.
Due to the pendency with the Federal Constitutional Court, the appeals are likely to be suspended by law until the Federal Constitutional Court reaches a decision.
How do I avoid a subsequent payment of income tax?
The income tax is an annual tax. That means that the tax department will check with your tax declaration how much income tax you have to pay for the past calendar year.
Whether you have to pay or get a refund depends on how much you have paid in advance. There are different variants of income tax advance payments. The best known are probably
- the taxes on wages (employees, civil servants, etc.),
- the quarterly income tax advances (self-employed, tradesmen, landlords, etc.) and
- the capital gains tax.
If you are assessed alone (unmarried, permanently separated, etc.), there is generally only an increased risk of an additional payment if you have above-average taxable income while receiving parental allowance (for example, due to rental income or similar).
Couples assessed together should examine the situation more closely. The greatest risk of an additional payment is if both parents have earned above-average income before the birth and one parent receives the maximum amount of parental allowance after the birth while the other partner changes to tax class 3 if income remains high, or - if self-employed - has the income tax advance payments reduced.
General statements and tips are therefore not applicable, so please consult your tax advisor and forecast the probable income tax liability so that you are not surprised."
FAQ - Parental allowance and tax declaration
Where do I enter parental allowance in my tax declaration?
Parental allowance, like other progression benefits, must be entered in line 38 of the mantle sheet.
How much tax do I have to pay for parental allowance?
A general answer is not possible due to the complexity of income tax law. It basically depends on the amount of taxable income and how much income tax has already been paid in advance.
When must parental allowance be taxed?
There is a strict inflow principle, i.e. if parental allowance was received in 2020, it must be declared in the tax declaration for 2020 (to be declared by 31.07.2020 or 31.12.2020 at the latest).
Is parental allowance taxable?
No, it is tax-free (see § 3 No. 67 EStG). However, it is subject to the progression clause according to § 32b EStG and therefore increases the tax rate on your taxable income.
Do I have to file an income tax declaration because of the parental allowance?
Anyone who has received more than EUR 410 in progression benefits (ALG I, maternity allowance, parental allowance, short-time work allowance, etc.) in a calendar year must always submit an income tax declaration so that the tax department can check whether you have paid enough income tax.
If you do not comply with the obligation to pay tax, the tax department may not contact you until years later and ask you to pay tax.
Too complicated? - Our tip
The parental allowance rules can be complicated. Make it easy and, like many other parents, use our services to get the most out of your parental allowance. We offer you many possibilities to make your application for parental leave as easy and uncomplicated as possible:
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