On July 24, 2024, the German government presented the draft of an “Act on the Further Development of Tax Law and the Adjustment of the Income Tax Rate(Tax Further Development Act – SteFeG)”.
According to the explanatory memorandum, this bill is intended to increase the basic tax-free allowance and the child tax-free allowance for the 2025 assessment period and from 2026 onwards in order to exempt the minimum subsistence level. On the other hand, a large number of individual measures are to be taken up that are thematically unrelated or only partially related, e.g.
- Reduction of the income tax rate,
- Reform of collective depreciation of assets,
- Continuation of declining balance depreciation for acquisitions in 2025 to 2028,
- Increase in the child allowance and child benefit and
- the transfer of tax classes III and V to the factor method.
Reduction in the income tax rate (from 2025):
The basic tax-free allowance is to be increased to exempt the minimum subsistence level (by EUR 300 in 2025 and by a further EUR 252 in 2026) and “cold progression” is to be offset by adjusting the tax rate (i.e. with the exception of the so-called “wealth tax”, the basic tax rates are to be increased, with the Federal Government assuming an expected inflation rate of 2.5 % in 2024).
Reform of collective depreciation of assets (Section 6 (2) EStG) by introducing group or pool depreciation (increase in the upper amount limit from EUR 1,000 to EUR 5,000). The initial amount of EUR 250 and the depreciation period of 5 years are to remain in place.
Continuation of declining balance depreciation (Section 7 (2) EStG) for movable fixed assets acquired or manufactured in the period from 2025 to 2028.
Increase in the child allowance (from 2025):
The child allowance is to be increased by EUR 60 to EUR 6,672 for the 2025 tax year and by EUR 156 to EUR 6,828 from the 2026 tax year.
Increase in child benefit (from 2025):
Child benefit is to be increased by EUR 5 to a total of EUR 255 per month with effect from January 1, 2025.
Factor method instead of tax classes III and V (from 2029 and 2030 respectively):
The transfer of tax classes III and V to the factor method agreed in the coalition agreement is also to be implemented with the draft bill in order to achieve “a fairer distribution of the income tax burden based on the joint wages received in the marriage or civil partnership”. In this respect, the tax-reducing effect of the splitting procedure is to be taken into account for each spouse or civil partner as early as the monthly wage tax deduction for their own wages and the higher taxation in tax class V is to be avoided. However, tax class IV should also remain the basic case for wage tax deduction. However, if an income tax return is submitted, there will be no additional tax burden, as was previously the case.
The author: Timo Unterberg
Anyone who knows me knows that tax law is my passion! When I am not advising young growth companies and medium-sized corporate clients on restructuring, financing issues or corporate succession, I am on the road as a lecturer in tax consultant training and continuing education. I also regularly write tax-related articles for specialist journals.
