State collects too much from pensioners

style="float: right; margin-bottom: 10px; font-weight: 600;"Tue 1st Jun, 2021

Millions of people can hope to pay less tax on their pensions. This is the result of a landmark ruling by the Federal Fiscal Court on Monday. Although Germany's highest tax judges rejected the specific complaint of a tax consultant and a dentist because of the accusation of double taxation. There was no double taxation in either case which is why the appeals were unfounded, the chairwoman of the X. Senate, Jutta Förs, emphasized.

For many other people, however, the ruling could bring real relief. This primarily affects working people who are yet to retire. Among people already drawing a pension, those who have only recently retired are likely to benefit the most. This mainly affects former self-employed, singles, men and future pensioner cohorts can hope for falling taxes. Forester emphasized that in many cases there could very well be impermissible double taxation, because the tax relief on contributions is lower than the taxation of pensions.

For the first time, the judges laid down a concrete formula for calculating double taxation, which will affect many pensioners in the future.Accordingly, the sum of the tax-free pension may not be lower than the sum of the contribution payments from taxed income. In calculating the tax-free pension, the court extrapolates the statistical life expectancy and thus the expected pension drawdown period. A possible survivor's pension of the spouse is also included in this calculation.

Unlike what has been done so far by the tax authorities, however, the tax offices may only look at the pension itself and how high the pensioner's tax-free allowance is or how high the taxable portion of the pension is. The basic tax-free allowance, the flat-rate income-related expenses allowance or tax-free social security contributions may not be included.More than 20 million people in Germany receive pensions. Since 2005, a gradual changeover of pension taxation has been underway, which is not expected to be completed until 2040. Before 2005, employees' pension contributions were taxed "upstream"; since then, the changeover to "downstream" taxation of the pension paid out has been underway, analogous to civil servants' pensions.

The regulation of the 35-year transition phase is controversial. During this period, the taxation of the pension paid out gradually increases, while the tax burden of pension contributions during working life decreases. From the outset, the complicated procedure led to accusations that the federal government was introducing double taxation of pensions through the back door and collecting too much in total.Pensioners can defend themselves against their tax assessment by appealing. However, experts now also expect a political solution that takes account of the court's concerns. The Federal Ministry of Finance announced its intention to change pension taxation. Together with the reform of income tax, which is planned anyway, the 100 percent deductibility of pension expenses could be brought forward from 2025 to 2023, said State Secretary Rolf Bösinger.

The Left Party announced that it wants to bring pension taxation to the forefront in the election campaign and put pressure on it. "Many people feel that the current way of taxing pensions is unfair," parliamentary group leader Dietmar Bartsch told the Daily Mirror. The fact that de facto poverty pensions are now being taxed is unacceptable, he said. "A declining pension level must not still meet a rising tax burden. Small and medium-sized pensions must generally be protected from taxation," Bartsch said.

Photo by Kelly Sikkema


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