The ten most popular tax misconceptions

  1. If I have submitted a tax return once, then I must always submit one

    False! There is a difference between compulsory tax assessment (“Pflichtveranlagung“) and the application for tax assessment (“Antragsveranlagung“). Taxes on wages or salaries are deemed to be fully covered by payment of wage tax (“Lohnsteuer”) for employees who generate no additional income, or only minor additional income, to their salary. However, they are entitled to submit an application (e.g. in the event of large business expenditure) for the submission of an income tax return (optional assessment, “Wahlrecht”). The decision regarding optional assessment can be made anew each year. On the basis of the misconception of having to file a tax return every year, many employees refrain from submitting an income tax return, which may mean that they do not receive a lucrative tax refund. It is usually particularly worthwhile to submit an income tax return if there is a considerable distance between your home and your place of work (at least 15 kilometres). Each employee is entitled to a blanket deductible for business expenditure (“Werbungskosten-Pauschbetrag“) of € 1,000. This sum is taken into account in the wage tax assessment of the current wage or salary. If this sum is exceeded, then any further expenditure (e.g. specialist literature, costs for additional training etc.) has a tax-reducing effect. However, it is not yet too late. Employees can submit an application for tax assessment (“Antragsveranlagung”) with retroactive effect for the four previous years, i.e. for 2016, this applies to the years after and including 2012. In any case, a calculation is always worthwhile. However, there are also exceptions for employees. Filing an income tax return is compulsory (“Pflichtveranlagung”) if, for example, spouses are respectively in tax categories 3 or 5, or if income substitution benefits (unemployment benefits etc.) have been paid in addition to wages or salary.
  2. Tax returns for the previous year must be handed in by 31 May of the following year

    The deadline of 31 May applies to all taxable persons who prepare their tax return themselves and are not represented by a tax consultant, lawyer etc. As far as representatives of the tax-advising profession are concerned, the extended deadline for the submission of their clients’ tax returns is 31 December; individual applications stating justifiable grounds may even lead to an extension of the deadline to 28 February of the following year. The official request for the premature filing of a tax return constitutes a special case for specific taxable persons. The tax office issues individual requests to these persons, demanding the submission of their tax returns by an earlier deadline (e.g. 31 August). This usually applies to persons who have repeatedly exceeded the deadline for the submission of their tax returns or have filed an application for the reduction of their income tax prepayments during the year.
  3. Tax assessment notices can only be changed within one month upon notification

    This is not entirely correct. The following general rule applies: an appeal – the strongest “weapon” of a taxable person – is only possible within one month upon notification. However, the Fiscal Code of Germany (“Abgabenordnung (AO)”) provides the tax office as well as the taxable person with further possibilities for appealing tax assessment notices outside the statutory appeal period. For example, a tax assessment notice may be issued with the reserved right to verification. This often occurs when the tax office would like to verify a specific issue.
    Reserving the right to verification entails that the tax assessment notice remains “open”, i.e. may be subject to amendment at any time – however, no longer than until expiration of the limitation period for tax assessment (usually 4 years). In such cases, tax-reducing documents may still be submitted after issuance of the tax assessment notice as well as after expiration of the appeal period (e.g. donation receipts which were found at a later date). Apparent errors (e.g. jumbled digits during transfer of data from the tax return etc.) on the part of the tax office may also be corrected upon expiration of the appeal period. Another possibility arises in the event of subsequently disclosed “new” facts. However, the legislator has provided for a limitation with regard to changes in favour of the taxable person. The subsequent disclosure of new facts must not be caused by culpability of the taxable person. Thus a taxable person cannot, in contrast to above-mentioned reserved right to verification, simply hand in additional documents which he had (culpably) failed to include and regard these as “new” facts. In such cases, the tax office points out the taxpayer’s duty to carefully prepare the tax return and to refer to the detailed explanatory notes applicable to the income tax form. By the way, this regulation has been an element of many lawsuits in tax courts and at the German Federal Fiscal Court (“Bundesfinanzhof“) as decisions frequently have to be made as to when a fact is “new” and when culpability has occurred on the part of the taxable person.
  4. If the tax office issues a tax estimate, this removes the obligation to submit a tax return

    False! If a taxable person fails to submit a tax return despite repeated requests by the tax office, then the tax office may estimate the taxable amount. The estimate is usually conducted on the basis of the previous years. However, an estimate does not replace the general obligation to submit a tax return! For the taxable person this creates a delicate situation with regard to procedural issues. The estimates are often higher than the actual figures. If the estimation notice is issued with the reserved right to verification, all taxable criteria are considered once the tax return has been submitted, i.e. the tax assessment notice is often changed in favour of the taxable person on the basis of the actual income.
    However, if the assessment notice is not issued with the reserved right to verification, or this reserved right is lifted, then a taxable person may only seek remedy for an estimate notice within the one-month appeal period. If he fails to do so and submits the tax return after the appeal period has expired, the regulation regarding subsequently disclosed facts (cf. number 3) applies. This means that if culpability arises on part of the taxable person, changes in his/her favour are usually not considered (e.g. lower income), whereas changes to the detriment of the taxable person can generally be made without limitation. To a specified extent, however, tax-reducing facts are considered in the assessment. Nevertheless, this situation should be avoided, and we strongly recommend meeting the submission deadlines for tax returns and appeals.
  5. If my income tax assessment notice shows a refund, then everything must be right

    Unfortunately not! Certainly, first of all, it is good news that you are getting money back. However, only an expert can tell you if you may be entitled to more. The tax office does not intentionally diverge from your tax return, but tax officials are also mere humans, and mistakes occur in every type of work. Nevertheless, it is annoying if errors are not discovered at all or are only discovered when it is too late. The changes that can be made to an assessment notice after expiration of the appeal period are limited (cf. 3). Obvious errors such as misspellings or false calculations may be corrected when the appeal period has expired, but the false application of points of law cannot. If in doubt, it is recommended to seek professional advice within a month on receipt of a tax assessment notice.
    By the way, at this point we would also like to mention the misconception that details which the tax office has formerly recognised automatically apply in the future. Unfortunately, that is not the case. If the tax office has recognised a specific issue in previous years, it does not automatically entail that this must be recognised in the future. Maybe it was a result of the false application of a point of law, or it was caused by an inattentive tax official. If he/she notices the mistake at a later date, or if he/she is replaced by another tax official or case officer, it may well be that some points of law are interpreted differently. Unfortunately, referring to the previous years is usually not particularly effective, or may even, under certain circumstances, lead to a so-called “reformatio in peius” (a change for the worse; a new, detrimental decision).
  6. Unemployment benefits, parental allowance (“Elterngeld”) etc. are always tax-exempt

    Correct! And, at the same time, not correct. The legislator has introduced a tax progression clause, the so-called “Progressionsvorbehalt“. In simple terms this means that this income is initially included in the calculation and determination of the tax rate, but the resulting (higher) tax rate only applies to income without consideration of unemployment benefits etc. Therefore, income substitution benefits can have effects on taxation. In particular, “Altersteilzeit” (a scheme for pre-retirement part-time employment), where a part of the salary is paid in addition to income substitution benefits, can often lead to bad surprises when preparing an income tax return. There is a difference between income substitution benefits which are subject to the tax progression clause and other benefits which are entirely tax-exempt – for example “Arbeitslosengeld II” (unemployment benefits, type II; better known under the name “Hartz IV”) as well as the Federal Employment Agency’s start-up grant.
  7. Foreign income is always tax-exempt

    Far from it! The so-called principle of taxation of worldwide income applies to taxation in Germany. If a person is domiciled or has usual residence in Germany and is thus fully liable to taxation in Germany, then his/her entire income – domestic and foreign – is subject to income tax in Germany. Only so-called double taxation agreements can exempt various forms of foreign income from German income tax, or can provide that payment of income tax abroad can be included in the calculation of German income tax. In Germany the so-called credit method (“Anrechnungsmethode“) applies, for example, to holiday apartments in Spain. This means that rental income for this flat is liable to full taxation in Germany, but under certain circumstances the income tax paid in Spain can be credited to the due German income tax. However, often income tax does not have to be paid in Spain due to granted tax relief for specified amounts so that the bad surprise comes with a German tax assessment notice where the entire domestic income and the surplus income generated from the Spanish villa are combined in a single calculation, which then may lead to high taxation. In turn, however, losses incurred through the Spanish holiday apartment can be fully considered in domestic taxation.
  8. Costs incurred through illness are tax-deductible

    Correct! Costs incurred through illness can constitute extraordinary costs. The legislator, however, deems it reasonable that each taxable person uses a certain part of his income to cover these costs. The reasonable amount is calculated on a percentage of the total income of the respective calendar year. The share ranges from a minimum of 1 % to a maximum of 7 % of the total income, depending on how high the total income is, whether the person is married or single, and how many children he/she has.
    Generally, not every purchase at a pharmacy and not every medical treatment are rated as extraordinary expenses. In particular, non-prescription medicine (cough syrup, flu medicine etc.) as well as vitamin products do not constitute extraordinary expenses, unless they have been ordered or prescribed by a doctor as part of a specific therapy. Neither does plastic surgery constitute an extraordinary expense, if surgery is not medically necessary.
  9. Craftsman invoices for work on my private home are always tax-deductible

    It depends. The legislator has imposed many conditions on so-called household-related services (“haushaltsnahe Dienstleistungen”). For one, the only tax-deductible part of a craftsman’s invoice is the payable amount for the wages, and of that only 20 % of the gross amount is deductible. Therefore, it is important to ask the craftsman’s company prior to receipt of the invoice to include the wages as an individual item. Furthermore, this invoice must be settled by means of bank transfer, not as a cash payment. Corresponding proof for this non-cash payment is to be presented to the tax-office upon request. The maximum amount for household-related services is € 6,000, resulting in a maximum tax-reducing effect of € 1,200 (20 % of € 6,000). It is thus recommended to conduct extensive modernisation works to the private home over a period of two or more years in order to be eligible for deduction of the full maximum amount twice or more often.
    By the way, (privately used) holiday apartments on EU territory are also categorised as private homes. Thus the painter’s invoice for the Spanish villa can be deducted from tax in compliance with above-mentioned criteria.
  10. As a small business (a so-called “Kleinunternehmer”) I can have a turnover of up to € 17,500 in the first year and no more than € 50,000 in the second

    True! But there is a special feature. § 19 of the German VAT Law (“Umsatzsteuergesetz”) provides the following: “The due VAT for turnover pursuant to § 1 section 1 No.1 is not charged by businesses (…) if the turnover as set forth in sentence 2 plus the levied tax on this turnover did not exceed € 17,500 in the previous calendar year and is not likely to exceed € 50,000 during the current calendar year.” For example if your turnover did not exceed € 17,500 in the first year, and you generate € 30,000 in the current year, you have definitely not exceeded the threshold for small-businesses with regard to the first and second year. However, the second year is also the first year! In the example given above you exceeded the limit of € 17,500 in the second year (€ 30,000) so that as of the third year you are no longer a small business and must charge VAT starting with the beginning of the calendar year! It is recommended for a small business to continually observe its turnover during the current year, as it is usually difficult to correct all invoices retroactively when it is discovered too late that the limit(s) has/have been exceeded. Under certain circumstances VAT may be levied on your net earnings, i.e. you have to pay from your own earnings 7 % or 19 % VAT to the tax office.
    At this point we would also like to point out the misconception of believing that “we only made a turnover of € 5,000 in the first year and that means that we are definitely a small business”. False! It depends on when you started your business activities as the tax office extrapolates your turnover to an entire calendar year. As a consequence, the € 5,000 would be damaging if you started your business activities on 1 October as the extrapolated annual turnover would not be € 5,000 but € 20,000, and you would thus by far have exceeded the limit for small businesses (“Kleinunternehmergrenze”).

No liability is assumed for the correctness and completeness of above-stated information. Individual cases may give rise to divergence. If you require further advice on any of these topics, please do not hesitate contacting us.