Application for Income Tax Reduction – The Path to a Higher Take-Home Pay

As an employee, income tax is deducted from your salary before it appears in your bank account. After all deductions, your gross salary becomes your net salary, which is ultimately deposited into your account. By filing a tax return, you can often claim deductions against your tax payments and thus recover any overpaid taxes. However, until the tax return is submitted and processed, these overpaid taxes are not in your account—they are held by the tax office instead. By applying for an income tax reduction, you may be able to change this situation in your favor and receive a higher net monthly salary after tax deductions. In this article, we’d like to explain how an income tax reduction works.

What is an income tax reduction?

“Normally,” income tax is deducted from the monthly salary as a flat rate, and the tax return is then used to determine whether there were any tax-deductible expenses that would result in a refund. This is how it works for the majority of taxpayers. If an income tax reduction is applied for and approved, the situation is different. As part of an income tax reduction, a tax-free allowance is granted. This allowance ensures that tax-deductible expenses are taken into account immediately rather than only later through the tax return.

Because certain expenses are already factored into your monthly deductions with the payroll tax reduction, you receive a higher net salary. It’s important to note that, in the long run, you won’t end up paying more or less in taxes. Only the timing of the payment changes. For some taxpayers, it is significantly more attractive to have more money in their account each month than to receive a larger refund at a later date. Does that sound good to you? Then read the following paragraphs carefully to learn how the application for income tax reduction works.

For which expenses can a tax deduction be granted?

First, we need to clarify which expenses are actually eligible for an income tax reduction. There is indeed good news here, as many expenses can potentially be used to claim a tax credit. Generally speaking, a tax credit can be applied for in relation to income-related expenses, special expenses, and extraordinary burdens. Since these terms and cost categories are already familiar to many taxpayers, we will not list the various costs here. If you are not yet familiar with what these terms entail, we would like to refer you to our relevant articles:

• Income-related expenses: Job-related expenses
• Tax advisor explains: 10 specific expenses to deduct on your tax return
• Tax advisor explains: The most important tax allowances for taxpayers

Application threshold for income tax reduction

We have now established that many of the classic tax-reducing expenses can be used as the basis for a tax deduction. So at first, it sounds as though every taxpayer could apply for a tax deduction. Unfortunately, however, there is a major restriction and hurdle here. For the tax office to approve and enter a tax credit, the respective expenses must exceed 600 euros. But that’s not all: To calculate the application threshold, the applicable flat-rate amounts are first deducted. For income-related expenses, the flat rate is 1,200 euros. So if you want to apply for a tax credit for income-related expenses, the expenses must total at least 1,800 euros. For special expenses and extraordinary burdens, the flat rates must also be taken into account. So before you proceed with the application for income tax reduction, you should check whether the application threshold is exceeded.

When should the application for income tax reduction be submitted?

The income tax reduction allowance is an annual amount that is distributed over the months following the application. The allowance can be applied for one or two years. It takes effect on the 1st of the month following the application. Generally, the income tax reduction process begins in October of the previous year. If you are unsure when you should or must submit your application, please consult a qualified tax advisor to avoid mistakes.

How does the application for income tax reduction work?

To receive an income tax reduction, you must complete an application and submit it to the tax office. The appropriate form(s) and attachments can be downloaded from the internet or requested from the relevant tax office. The forms are structured similarly to the tax return. Therefore, most taxpayers should have no trouble filling them out. Once all forms have been completed, the application simply needs to be submitted to the relevant tax office. If you have trouble filling out the forms or are unsure about anything, we always recommend asking an experienced tax advisor for help. This is the only way to ensure that the application is submitted without errors. An application can also be rejected due to formal errors. So save yourself the hassle and contact our team.

Income Tax Reduction and the Obligation to File a Tax Return

Not every taxpayer is required to file a tax return. However, once the tax office grants an exemption and an income tax reduction, this results in an obligation to file a tax return. The tax return must be filed for the relevant period without being asked to do so. If you are considering applying for an income tax reduction, you have likely been filing tax returns voluntarily anyway. Therefore, not much changes. You should nevertheless be aware that a voluntary filing becomes an obligation.

Obligation to Report Changes in Income Tax Reductions

It should actually be obvious that you must report changes in the relevant expenses. It can always happen that the expenses underlying the income tax reduction no longer reflect reality. At this point, it is important that you do not simply rely on the tax-free allowance but promptly inform the tax office. If this reporting obligation is not met, you can expect to face significant back payments.

Tax Consulting in Düsseldorf and Oberhausen

For some taxpayers, applying for an income tax reduction can be quite beneficial. Since the application and the associated requirements can be confusing, we always recommend relying on the expertise of a tax advisor. With our offices in Düsseldorf and Oberhausen, we are always available to assist you with your tax-related questions. Contact us to schedule a consultation.