Relief through the Inflation Compensation Act

The Inflation Compensation Act is intended to curb the creeping tax increases associated with cold progression and provide tax support for families.

For some time now, the German government has announced the now regular compensation of the cold progression in income tax and repeated the announcement as part of the third relief package. In September, the government presented the draft for an inflation compensation law and passed it on to the parliaments for consultation.

The adjustments are not only intended to avoid additional tax burdens, but also mean less administrative work: for more than 270,000 taxpayers, the obligation to submit a tax return will no longer apply. This affects around 75,000 pensioners, among others. The following changes are planned in detail:

• Basic allowance: The basic allowance, also known as the tax-free minimum subsistence level, will be increased by 285 euros to 10,632 euros on January 1, 2023. A further increase of 300 euros to 10,932 euros is planned for 2024.

• Tax rate: The so-called rate benchmarks will be shifted to the right in line with expected inflation. This means that the top tax rate will start at EUR 61,972 in 2023 instead of the previous EUR 58,597, and from EUR 63,515 in 2024. This will offset the effect of cold progression. On average, employees will have 192 euros more net income next year than this year if their income does not change. Particularly high incomes (the so-called wealth tax) from 277,836 euros are expressly excluded from this adjustment.

  

• Child support: Child benefit will be increased to a uniform 237 euros per month for the first, second and third child from January 1, 2023. This corresponds to an increase of 18 euros for the first and second child and 12 euros for the third child.

• Child allowance: Corresponding to the increase in child benefit, the child allowance will also be increased for the years 2022 to 2024, namely for 2022 retroactively by 80 euros from 2,730 euros to 2,810 euros. In 2023, the allowance per parent will then rise by 70 euros to 2,880 euros and in 2024 by a further 114 euros to 2,994 euros.

• Maximum maintenance amount: The basic tax-free allowance has already been increased twice this year without the usual corresponding adjustment to the maximum maintenance amount. This is now being made up for and the maximum maintenance allowance for 2022 will rise from EUR 9,984 to EUR 10,347. In addition, the adjustment will be automated for the future in that the maximum maintenance amount will always refer to the applicable basic allowance in future.