Traffic light steps against double taxation are not enough

Pensioners in Düsseldorf

Despite the reforms, millions of people continue to be affected by double taxation.

(Photo: IMAGO/Michael Gstettenbauer)

Berlin The double taxation of pensions costs retirees money and is illegal according to two rulings by the Federal Finance Court (BFH). The traffic light coalition has already taken steps to defuse the problem.

But these are apparently not enough, shows a recently published scientific report commissioned by the Federal Ministry of Finance. Accordingly, future pensioners continue to experience cases of sometimes significant double taxation.

The most important questions and answers:

How does double taxation of pensions occur?

With the Retirement Income Act in 2005, the then red-green federal government initiated a system change – away from taxation of pension contributions towards downstream taxation of retirement benefits. This means that income tax is due on retirement income.

During a long transition phase, an ever-increasing portion of the pension becomes taxable, while employees can deduct higher portions of their retirement provision expenses from tax. According to the original plans, full taxation of pensions should be achieved in 2040.

>> Read here: What the Federal Finance Court’s ruling means for current and future pensioners

However, in certain cases, the transition may result in unacceptable double taxation. Retirees then pay taxes again on part of their already taxed pension contributions. According to the BFH definition, double taxation occurs if the tax-free pension inflow is lower than the taxed pension contributions.

What has the traffic light coalition already done to defuse the problem?

Since last year, pension insurance contributions can be fully deducted from taxes as special expenses. In addition, the taxable pension share has no longer increased by one percentage point annually since 2023, but only by half a point. This extends the transition phase; full taxation of pensions will not be achieved in 2040, but only from 2058.

Do the reforms prevent undue double taxation?

The scientists Ralf Maithert, Dirk Kiesewetter and Ralf P. Schenke come to the conclusion that the traffic light reforms defuse the problem because the savings and payout phases are better coordinated. However, in certain cases, inadmissible double taxation can still occur.

>> Dossier for download: Guide to tax returns 2022/2023 – How to get the most out of it now

“However, it is not possible to summarize which taxpayers are affected in a simple formula,” says the report. This depends on several factors, such as the income earned, the number of years of contributions or marital status.

Who is further affected by double taxation?

However, some statements can be made. According to the old law, documents from individually assessed employees were still almost 83 percent subject to double taxation, but after the federal government’s reforms it is still a good 30 percent. Of the employees in couple households with a joint tax return, only 4.4 percent are affected.

Entrepreneurs and freelancers are also taxed twice in certain cases. In total, the problem still affects a good 3.4 million people.

To what extent is income subject to double taxation?

This also depends on your employment history, family situation and the year in which you retire. Single average earners with 45 years of contributions face the highest burden when they retire in 2058. Then income of 13,700 euros will be taxed twice.

If you earn more than the pension insurance contribution assessment limit, significantly more people are affected by double taxation. A maximum of 28,300 euros will then be taxed twice. For top earners, the double-taxed income can amount to a good 80,000 euros, depending on the year of retirement.

What do the scientists suggest?

The experts recommend supplementing the traffic light reforms with an additional pension allowance depending on the number of contribution years and year of retirement, as well as an individual pension allowance upon application. This construction prevents double taxation in almost all assessment cases, they write.

However, the proposal would also lead to a significant reduction in revenue for the tax authorities. According to the scientists’ calculations, tax losses will exceed the two billion euro mark from 2037 and will reach their peak between 2044 and 2048 at almost five billion euros annually, before falling back below the two billion euro mark at the beginning of 2060.

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