Pension and double taxation: important questions and answers

Ruling on pension taxation – Important questions and answers

Pension and double taxation: important questions and answers

How pensioners save on taxes

Since 2005, pensioners have to pay tax on parts of your pension. But you can declare many costs to reduce the taxable income and so save taxes in the end. The tips in the video

Berlin/Munich. The Federal Fiscal Court has ruled on the double taxation of pensions. For the first time, the judges presented a formula for the calculation.

  • Is the double taxation of pensions unconstitutional??
  • On Monday, the Federal Fiscal Court issued its eagerly awaited ruling
  • The ruling could have far-reaching consequences for the federal budget and millions of pensioners

Germany’s highest fiscal court this Monday issued two rulings on the Pension taxation announces. The issue at stake was whether the federal government, in the course of the gradual changeover of pension taxation that will continue until 2040, should be taxed at the expense of the Pensioners collected too much.

A tendency had the X. Senate of the Federal Fiscal Court in Munich with the verbal negotiations before scarcely two weeks not to recognize let. Now the judges decided on two lawsuits. "The appeal is unfounded because there is no double taxation," said chairwoman Jutta Forster on the first complaint.

In this case, a former tax consultant from Baden-Wurttemberg had filed a lawsuit accusing the tax authorities of unlawful double taxation of his pension. At issue is the change in pension taxation, which has been underway since 2005 and is not scheduled to be completed until 2040. Judges also dismissed second lawsuit filed by retired dentist.

Pensions and double taxation: what does the ruling mean for pensioners?

The Federal Fiscal Court sees in the coming years an excessive tax burden on many pensioners in Germany to come. Pointing out this danger to X. Senate in its ruling. According to the judges, neither the basic tax-free allowance nor health and long-term care insurance contributions may be included in the calculation of the tax-free portion of the pension.

This does not have any immediate impact, but it could have a big impact in the future. Because the Federal Fiscal Court thus suggests to the Federal Ministry of Finance to change the previous practice in the pension taxation.

The basic tax-free allowance serves to secure the subsistence minimum and should not be used a second time as a tax-free pension deduction. "Our answer is no," said Senate President Forster to this question, which has been discussed among tax lawyers for almost 20 years now.

Pension: Why did the Federal Fiscal Court have to decide?

At the heart of the proceedings was the question of whether at least some of the approximately 21 million pensioners are currently being subjected to unconstitutional taxation Double taxation comes. The starting point was the corresponding lawsuits of two retirees.

Previously, the negotiations had already been postponed several times. If the state had had to avoid double taxation in the future as part of a reform that would then have been necessary, it would have been expensive for the treasury. Between 2020 and 2040, the revenue shortfall would have amounted to an estimated 90 billion euros, according to an analysis by the Institute of the German Economy (IW), as previously reported by the "Handelsblatt" newspaper.

Pension and double taxation: important questions and answers

Taxation of pensions: Why did it take so long for the ruling?

Actually, the judges already wanted to take on the matter last November and provide clarity. However, as with so many things, the case came to Corona pandemic in between. The oral hearing was initially postponed to January, then to the second quarter of 2021. "We are well aware of the explosive nature of the issue", A spokeswoman for the court said earlier this year in response to a question.

All texts in the tax series

  • Tax series part 1:All changes for 2020 at a glance
  • Tax Series Part 2:How to lower your tax burden with pensions
  • Tax series part 3:How to account for home office expenses
  • Tax series part 4:How parents can save taxes with childcare costs and school fees
  • Tax series part 5:How pensioners account for their payments
  • Tax Series Part 6:So you can deduct expenses for craftsmen and co. drop off
  • Tax series part 7:Who should declare investment income on their tax return

Double taxation of pensions: What exactly is the new regulation about??

The background to the legal dispute is a new regulation from 2005. While Pensioners had to pay their contributions out of their already taxed income until then, and the retirement benefits were tax-free, it will be the other way around in the future. In a transitional period since 2005, an increasing share of insured persons’ contributions has gradually been tax-free, while the pension has been increasingly burdened. From 2040, a full 100 percent of pensions will be taxed. At the same time, pension expenses will be fully tax-free starting in 2025. From a 40 percent taxation in 2005, it decreases by two percent annually.

  • While pensioners had to pay their monthly contributions out of their already taxed income until 2005, and retirement benefits were tax-free, in the future it will be the other way around.
  • Then the pensions are fully taxed and the contributions are no longer taxed. The transition will take place gradually and over several years.
  • For example, since 2005, gradually larger and larger portions of the insured’s contributions have been tax-exempt, while the Pension increasingly burdened.

Experts speak of a change from upstream to downstream pension taxation, since once before and once after the pension is taxed twice Retirement Taxes become due.

Because of this change, the two plaintiffs – a dentist and a tax consultant – and their wives felt disadvantaged. They believe they will be taxed twice. And they are not alone in this view.

The Taxpayers’ Association (BdSt) supported the proceedings and sees a double taxation of many pensioners, to which the Federal Ministry of Finance turns a blind eye.

A response from the Federal Ministry of Finance in April to an FDP question shows that throughout Germany, there is currently a 142.000 appeals by retirees against possible double taxation are pending.

pension: How the tax burden changes?

In 2005, retirees still had to pay half of their Pension taxable. Currently, it is about 80 percent and then in 2040 full 100 percent will be taxable. Decisive for the amount of taxation of retirement benefits is the year of retirement. The tax burden on employees’ pension contributions, on the other hand, decreases continuously by two percent per year. In 2005, a share of 40 percent was still taxed; in 2025, this share is to be zero.

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So where exactly does the problem lie with the taxation of pensions?

Actually, this opposing mechanism was intended to create a balance in order to prevent unlawful double taxation of contributions and later pension payments. However, numerous experts have long criticized the fact that insured persons are relieved of less tax as contributors than they will later have to pay in the Retirement age are taxed.

First the contributions would be taxed and later the pension paid out. This is de facto a double taxation. The originally planned equalization in Transitional period does not work, according to critics. Such a double burden by the tax authorities also complains the plaintiff in the proceedings before the Federal Fiscal Court.

Pension: Who does it hit?

It is mainly future retirees who could be affected by double taxation. The reason for this is the different time axes at the Change of procedure. Thus, although the pension is fully taxable at the start of retirement in 2040, the contributions paid into the pension insurance for this purpose are only fully tax-deductible for 15 years, namely from 2025 to 2039. Read also: Tax return 2020: Which deadlines apply this year

However, there is already a group that is affected today: Self-employed, who pay into the pension insurance scheme voluntarily. They make the contributions from their already taxed income and later have to pay taxes on the pension again. However, according to experts, the number of such cases is rather low. Employees who retire now or are already retired, on the other hand, are not affected.

Why was the system change necessary in the first place?

At the time, the legislature had to implement a ruling by the Federal Constitutional Court. In 2002, the highest judges had demanded an adjustment of the pension taxation to the regulation of civil servant pensions, which had already been fully taxed in all the years before. It was valid, a Unequal treatment to end. However, the court demanded a new regulation that prevents double taxation. Several experts, however, see precisely this requirement as not being met.

Why was this problem not recognized earlier?

criticism has existed for a long time. But only now a supreme court decision is pending. Ultimately, the main issue is how to calculate. According to the specifications of the Federal Constitutional Court Retirees must receive in the sum at least as much pension tax-free, as they paid in during their working life taxable, in order to prevent a double taxation. However, there are no binding criteria for what all counts toward the tax-free pension. In a narrower sense, it is only the amount that is paid out without deductions.

However, the tax authorities also provide tax benefits such as Allowances as well as deductible health and long-term care insurance contributions included in tax-free pensions. Thus it turns out accordingly higher arithmetically. According to this reading, there is no double taxation because the tax-free portion of the pension is higher. This is probably also the argument of the Federal Ministry of Finance. What is disputed is which way of calculating is the correct one. This is exactly what the dispute before the Federal Fiscal Court is all about. The plaintiff ultimately demands clear criteria for what may and may not be added to the tax-free pension.

pension: What the opposition says?

The parliamentary group leader of the Left Party in the Bundestag, Dietmar Bartsch, Urges speedy clarity. "The federal government should have done something about double taxation a long time ago", said Bartsch in February to our editors "the pension taxation must be put to the test".

It could not be that a decreasing pension level met with an increasing tax burden in old age. Already today, net pensions in the poverty range of about 1000 euros are taxed, Bartsch criticized. Low and medium pensions should be protected from taxes. In his own words, he expects a landmark ruling from the Federal Fiscal Court on double taxation.

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