Inflation compensation law has been passed

The Bundestag and Bundesrat significantly increased the tax relief provided by the Inflation Compensation Act and passed the law at the beginning of November.

Taxpayers are to have significantly more money in their pockets at the turn of the year. The governing coalition is implementing this plan with the Inflation Compensation Act, which the Bundestag and Bundesrat passed at the beginning of November. During parliamentary deliberations, the tax relief has been significantly increased once again.

The core of the law is the regular equalization of cold progression and the adjustment of the basic allowance and child allowance in line with general price trends. The Bundestag has made significant improvements to child benefit in particular, setting the benefit at 250 euros per month from the first child onwards. Originally, only an increase to 237 euros was planned for the first three children. Here is an overview of the changes brought about by the final Inflation Adjustment Act:

• Basic allowance: The basic tax-free allowance, also known as the "tax-free subsistence minimum", will be increased by 561 euros to 10,908 euros on January 1, 2023. A further increase of 696 euros to 11,604 euros is planned for 2024. Originally, an increase of only 285 euros was planned for 2023 and 300 euros for 2024. The current high inflation rate has led to a significant improvement in the legislative process.

• 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 62,810 euros in 2023 - an increase of 4,213 euros compared to the previous year (2022: from 58,597 euros). A further increase of €3,951 to €66,761 is planned for 2024. This will offset the effect of cold progression. The so-called "wealth tax" from EUR 277,836 is excluded from this adjustment and will remain unchanged in 2023 and 2024.

• Child support: Child benefit will be increased to 250 euros per month for the first, second and third child from January 1, 2023. From the fourth child onwards, there is already 250 euros. This corresponds to an increase of 31 euros for the first and second child and 25 euros for the third child. As a result of the new increase, parents will receive 250 euros a month in child benefit for all children from 2023 - the largest increase in child benefit in the history of the Federal Republic of Germany.

  

• Child allowance: Corresponding to the increase in child benefit, child allowances will also be increased for the years 2022 to 2024, namely for 2022 retroactively by €80 from €2,730 to €2,810. In 2023, the allowance per parent will then increase by 202 euros to 3,012 euros and in 2024 by a further 180 euros to 3,192 euros.

• Solidarity surcharge: For the first time since the partial abolition of the solidarity surcharge, the tax-free amount will be increased from the previous 16,956 euros to 18,130 euros (36,260 euros instead of 33,912 euros for joint taxpayers). The adjustment of the tax-free amount means that only the ten percent of the highest incomes will continue to be subject to the solidarity surcharge and inflation will not subject more taxpayers to the solidarity surcharge.

• 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.

• Tax declaration obligation: The system for determining the salary thresholds for exemption from the obligation to submit an income tax return will be adjusted and will in future refer to the sum of the basic tax-free allowance, employee lump sum and special expenses lump sum. Together with the increase in the tax benchmarks, the Inflation Adjustment Act should also lead to less administrative work. In the draft version, the Ministry still assumed that over 270,000 taxpayers would no longer be required to submit a tax return, including around 75,000 pensioners. Due to the increase in the basic tax-free allowance, these figures are likely to be even higher in the final version.