Second family relief law in the works

More child benefits and an adjustment of tax benchmarks mean a financial improvement for families in particular.

In its coalition agreement, the grand coalition has committed to increasing child benefits by 25 euros per month and child in this legislative period. The coalition had already implemented the first step of this plan by increasing child benefit by 10 euros as of July 1, 2019. Now comes the second part of the child benefit increase, which the government is combining, as with the first step, with the regular adjustment of the tax-free subsistence minimum to the development of the cost of living.

To this end, the Federal Ministry of Finance has presented the draft of the "Second Family Tax Relief Act and the Adjustment of Other Tax Regulations", which was approved by the Federal Cabinet on July 29, 2020. According to this, this Second Family Tax Relief Act still has to pass the Bundestag and Bundesrat before the end of the year. Despite its grandiose name, the law contains only the regular adjustments to the tax scale and some detailed changes to the church tax deduction on investment income, in addition to the second stage of the child benefit increase. In detail, these are the following changes:

• Child support: Child benefit will be increased by 15 euros per child per month as of January 1, 2021. It will then amount to 219 euros per month for the first and second child, 225 euros for the third child and 250 euros for each additional child.

• Child allowance: In parallel with the increase in child benefit, the child allowance will also be increased in 2021 by 144 euros for each parent to 2,730 euros (i.e. by a total of 288 euros to 5,460 euros). In addition, the care allowance for each parent will rise from 1,320 to 1,464 euros - an increase of 144 euros per parent as well. Overall, these changes result in an increase in the tax-free allowances for the minimum subsistence level for children from the current total of 7,812 euros by 576 euros to 8,388 euros for each eligible child.

  

• Basic allowance: As a result of the findings of the 13th Subsistence Minimum Report adopted by the German government on September 23, 2020, the basic allowance (tax-free subsistence minimum) will be adjusted. For 2021, this will increase by 288 euros from the previous 9,408 euros to 9,696 euros, and in 2022 the increase will be a further 288 euros to 9,984 euros. The same increases also apply to the maximum amount for the deduction of maintenance payments.

• Cold progression: To ensure that wage increases also reach employees' wallets, the effect of "cold progression" will be offset for the years 2021 and 2022, as is now customary. To this end, the benchmarks of the income tax scale will be shifted by the inflation rate of the previous year - this corresponds to an increase in the benchmarks of 1.52 % for 2021 and 1.50 % for 2022.

• Capital gains: There are two clarifying amendments regarding the withholding of church tax on investment income within the framework of the final withholding tax, which, however, do not have any significant consequences because they only clarify procedures already practiced.

• Data query: Until now, banks have been required to query the church tax deduction details of a capital investor at least once a year with the Federal Central Tax Office. In the future, such a query will also be mandatory when a business relationship is established (e.g., when an account is opened) in order to ensure that the church tax deduction is up-to-date. In this context, the banks' duty to inform their customers will also be amended. They will now only have to inform customers about the data query and the existing right of objection when a business relationship is established. In addition, a general notice, e.g. in the general terms and conditions, is sufficient.

The measures planned for 2021 and 2022 reduce the burden on taxpayers by a total of around EUR 12 billion a year. In absolute terms, the improvement increases with income. In relation to the taxes payable, however, lower and middle incomes benefit more than higher incomes.

At the Bundestag hearing on the draft law, several experts described the relief for families as too low. The Taxpayers' Association, for example, pointed out that almost EUR 10 billion of the annual effect of the relief bill, estimated at around EUR 11.8 billion, would be accounted for by adjustment steps that were in any case indispensable and required by constitutional law. This means that most of the proposed legislation is merely a compulsory political program.