Retirees to face taxation for the first time from their pension earnings. - First-time tax payment for pensioners starting from a specified pension amount
Breaking News: Taxes to Affect Some Retirees Following Pension Increase
Retirees in Germany will receive a 3.74% increase in their pensions, beginning July 1, 2022. This announcement was made by former Federal Minister of Labour, Hubertus Heil (SPD). For a standard pension with average earnings and 45 contribution years, individuals can expect an additional €66 per month.
Heil described the decision as "good news," stating that stable pensions are a reflection of performance-based justice. However, he did not mention that many pensioners will exceed the tax-free allowance with the increased pension, leading to potential taxation.
Previously unmentioned, the pension increase will lead many pensioners to file a tax return for the first time due to surpassing the tax-free allowance. The tax-free allowance will be €12,096 for singles in 2025.
Approximately 73,000 pensioners are expected to be affected, resulting in additional revenues of around €4 billion for the federal budget.
The tax burden, however, depends on the year of retirement. For example, individuals retiring in 2025 will have to pay 83.5% of their pension in income tax, while 16.5% remains untaxed. The tax-free amount is based on the pension received in the year of retirement and does not increase with pension raises.
The following table illustrates the potential tax risks for individuals based on their retirement year and pension amount:
| Year Retired | Gross Monthly Pension | Tax Return Required ||--------------|-----------------------|---------------------|| 2022 | €1,200 | Yes || 2020 | €1,260 | Yes |
However, not every pensioner is immediately liable for tax. Expenses such as medical costs, donations, or home-related services can be claimed via the tax return to reduce the tax burden.
It's essential to note that taxation is not triggered by a pension increase; instead, the tax-free portion is locked in when the pension is first received. Any future pension increases result in only a smaller relative tax-free portion, but the absolute tax-free amount remains constant.
RetirementPensionTaxPension IncreaseTax ReturnPension SystemTaxation
- Given the pension increase, retirees may need to consider vocational training to adjust their personal-finance and business strategies, as the higher pension might surpass the tax-free allowance and trigger a tax filing requirement in subsequent years under the community policy.
- To mitigate the potential tax burdens resulting from the pension increases, the government could consider implementing adjustments in the pension system, such as periodic tax-free allowance updates that follow pension raises, thereby ensuring a more equitable balance between retirees and the federal budget.
