There are 6 tax classes (Steuerklassen) in Germany that can be assigned to you by your local tax office to help your employer calculate your monthly income tax (Lohnsteuer).
Tax classes are determined by your marital/family status and most single persons are automatically assigned tax class 1. There are certain exceptions for married couples, read on to learn more!
Tax Class 1
All single persons are automatically assigned with tax class 1, which is also the class that pays the least amount of taxes. For example – those in tax class 1 automatically receive an income-related expenses lump sum (Werbungskostenpauschale) of 1,000 euros, which is automatically deducted from their annual taxable income.
The current basic tax-free allowance (Grundfreibetrag) amounts to 9,984 euros, meaning if you earn less than this amount annually you don’t have to pay any taxes. On the other hand, anyone earning above 450 euros per month are generally found in tax class 1 along with unmarried, divorced, widowed, or separated persons.
Tax Class 2
Tax class 2 is meant for single parents and, therefore, is similar to tax class 1 but with increased tax allowances (Freibeträge) and a reduced tax burden. You must apply to be assigned with this tax class – it will not be assigned to you automatically.
In order to qualify for tax class 2, you must be an employed single parent with no legal partnerships and live in the same house as your child(ren). Currently, if single parents are not the sole leader of their household, they cannot qualify for tax class 2. If you are in this tax class, you are obliged to inform the tax office of any changes in your living arrangements.
Tax Class 3
Tax class 3 is solely intended for married couples and used in combination with tax class 5, with tax class 3 having the lower tax rate of the both. The partner assigned with tax class 3 will benefit from any tax allowances and lump sums for both partners, while the spouse in the other tax bracket will not receive any of these deductions. This is profitable if both partners have greatly different incomes and the partner with the higher salary is placed in tax class 3. The purpose is to show that the couple is part of an income “union” and are taxed together.
Those in tax class 3 receive double of the basic tax-free allowance (counting for both partners) and, since they are in a tax class combination of classes 3 and 5, their overall net income is increased.
Tax class 3 can only be assigned to an employed spouse earning at least 450 euros per month.
Tax class 4
Tax class 4 can only be assigned to married persons and is an alternative to the tax class 3/5 combination. In 2010, the tax class 4/4 with factor option was implemented which helps married taxpayers avoid the disadvantages from the 3/5 combination by paying taxes based on what they contribute to the “common household income.”
This option is only available for married couples who both earn at least 450 euros per month and who are both willing to be assigned with the same tax class.
Tax Class 5
Tax class 5 can only be assigned to a spouse whose partner is assigned with tax class 3. Tax class 5 is technically the most disadvantageous of all tax classes if considered alone, but as it is always combined with tax class 3, it can be beneficial in certain situations.
Generally, the spouse who earns less annual income should select tax class 5 while the partner with higher income selects tax class 3. Tax allowances and lump sums do not exist in tax class 5 as they are all transferred to the partner in tax class 3, which allows the partner with higher income to have a lightened tax burden and bring home an overall combined higher net income. Tax class 5 can only be assigned to married spouses who earn at least 450 euros per month.
Tax class 6
Tax class 6 is a special tax class assigned only to employees with 2 or more jobs. This tax class is used to tax the income from any jobs that are separate from their “main” career – there is no basic tax-free amount or allowances that can be deducted from income from a second job taxed according to tax class 6.
Employees can decide themselves which job they’d like to assign to tax class 6, although it is recommended to delegate this class to the job which pays the least amount of income.