Tax Return: Making use of financial instruments in Germany

The longer we live in Germany the more we have to face such topics. Because some state and private insurances and financial tools you can add to your tax declaration it can really make a difference in your choice what financial tools to take. You can declare a number of insurance contributions on your tax returns. We explain which ones they are.

Many people relate insurances and financial tools to taxes. I hear this question often when I explain basic insurances like Haftpflicht, pensions, private health insurance and Berufsunf?higkeit. This article will help you to understand the tax side from your insurances and investment tools.

GKV - Public health Insurance 

Taxpayers who are insured with a statutory health insurance can assume that they will be able to deduct almost all of their health insurance and long-term care insurance contributions (Pflegepflichtversicherung). This is specially interesting for tax payers with higher salary, that have a higher contribution to the GKV.

If you have an additional private health insurance as dentist or ?Chefarztbehandlung“ this will not be able to deduct.

Where do you enter statutory health insurance in the tax return?

GKV Public health Insurance belongs to ?Sonstige Vorsorgeaufwendungen“.

Just for your understanding : ?Vorsorgeaufwendungen“ are expenses that you use to provide for your future. "Vorsorgeaufwendungen" are divided into health and long-term care insurance, pensions and other basic insurances.

Financial Insider: All that sounds great, but however, on part of the annual maximum amount for expenses on ?Sonstige Vorsorgeaufwendungen“ EUR 1,900. This applies to employees and civil servants. For the self-employed, the maximum amount is 2,800 euros per year. for example if you surpass this maximum amount with your health insurance payments, the surplus will not be taken into account for getting taxes back.

Haftpflicht, Berufsunf?higkeitversicherung, Unfallversicherung, Risikolebensverischeurng, KFZ Verischerung

Basic states and private insurances as for example private liability, private and statutory accident insurance, risk life insurance, disability insurance are part of the ?Sonstige Vorsorgeaufwand“.

So, yes! You can add them to the tax declaration but mostly you have used the top of 1900€ to cover the basic health insurance and long term care insurance portion . However, it will hardly be of use to you financially!

Financial Insider: Add everything in your tax declaration, it doesn’t cost you anything, what will be taken into account will be determined by the Finanzamt. When in doubt, it is better to state as much as possible.

Insurance policies that have nothing to do with future security cannot be deducted as Vorsorge expenses. The usual Hausrat or Rechtschutz (exception for the professional Rechtschutz) insurance fall into this category.

Only Insurances used for your profession can be tax beneficial, for example: professional liability insurance, legal protection insurance (proportionately for the work area, Arbeitsrechtschutz). This you can add unlimited as "Werbungskosten". 

PKV - Private Health Insurance

For the private health insurance we have the same situation as the statutory one, the basic tariff is tax deductible.

Contributions to a private health insurance are also considered ?sonstige Vorsorgeaufwendungen“ expenses and are partly tax-deductible as expenses. Partly because as mentioned, they count only at the same level as in the social system (gesetzliche Krankenversicherung). This is the so-called basic health insurance. The contributions to long-term care insurance (Pflegepflichtversicherung) are 100 percent tax-deductible. The extra Krankengeld benefit is not part of the basic protection.

Where do you enter private health insurance in the tax return?

Private health Insurance belongs to ?Sonstige Vorsorgeaufwendungen“.

Financial Insider: Those with private health insurance have sometimes agreed on a deductible, and pay a part of the medical costs themselves before using the private health insurance. Because they have this "Selbstbehalt" their monthly contribution is lower.

If you do not use the insurance for a year you get a monetary Bonus (Beitragsrückerstattung) to your bank account. This Bonus payment counts as a reimbursement that reduces the Vorsorgeaufwendungen and therefore also your tax amount to be deducted. We learned however that the threshold of the Vorsorgeaufwendungen ist easy to fill up to the maximum, so this is still a good financial deal.

GRV - Statutory Pension 

Taxpayers can deduct the costs for provisions for older days, which serves as basic protection, as special expenses (Sonderausgaben). This includes, for example, contributions to statutory pension insurance. In this case the amount that you are able to add to your tax declaration is much higher. And this gives you room to play a bit more with tax advantage. Various expenses can be deducted for one private (Basisrente/Rürup Rente) and also for statutory pension insurance.

Since 2020 the maximum deductible amount has been € 25,046. For married couples, double the amount applies. However, the tax office recognises for now 90% of the stated expenses for 2020. But it does increase year per year. For 2021 this rate will increase to 92% and for 2022 to 94%, until 2025 the Pension will be tax deductible to 100%.

Where do you enter statutory pension insurance in the tax return?

The payments made are to be entered in the "Anlage Vorsorgeaufwand".

Private Pensions with Tax Benefits

As we find out in the last articles the statutory pension will not be sufficient for you to maintain the same standard of living after you are done working. The government wants to motivate the citizens and all tax payers (all humans) to save additional for the retirement. Thats why two kinds of German private pension plans are tax deductible.

Riester Rente

The tax authorities promote the Riester savings primarily through state allowances and tax benefits. These are credited to the pension contract. For high earners, tax savings of a few hundred euros are also possible! - due to the special expenses deduction of this private pension plan.

If you belong to the eligible group of savers who receive allowances for the Riester pension, you can, in the best case scenario, deduct up to € 2,100 as special expenses. Each individual, so every eligible spouse is entitled to this maximum amount. In order for you to receive the full state subsidy, you have to save 4% of your pensionable income minus the allowances called ?Staatliche F?rderung“.

These allowances are: € 175 (up to 2017: € 154) per year basic allowance per person, if you are younger than 25 you get a one time state bonus of € 200. 

For children born before 2008 there is a child allowance of € 185, for children born later there is € 300.

Where do you enter the private Riester Plan in the tax return?

Riester contributions are ?Sonderausgaben“. But you do not add your Riester contributions in the ?Sonderausgaben“ cover sheet, but in the Appendix AV/Anlage AV (Altersvorsorge). Here you enter what you have paid into the Riester contract.

Financial Insider: In particular, childless taxpayers and high earners benefit more from the special expense allowance than and can profit more from the tax benefits. Families with several members with more state benefits are discounted from the tax advantages. 

The tax office then automatically calculates what is more advantageous for you: allowances or special expenses deduction. This is called Günstigerprüfung in Germany. Thank you Finanzamt, since the Günstigerprüfung usually works in your financial advantage. :)

Rürup Rente or Basisrente 

Did you know that at the end of the year the number of Rürup pensions increased significantly? This has mainly to do with the tax advantages in the savings phase that Rürup offers. Because you can deduct a large amount from your tax and get something back from the tax office, many people decide to quickly take out a Rürup pension. You can contribute monthly (due to your personal budget) and also add additional payments at the end of the year to save more taxes.

The Rürup Rente is the twin of the statuary Pension and enjoys the same advantages. 

Since 2020 the maximum deductible amount has been € 25,046. For married couples, double the amount applies. However, the tax office recognises 90% of the stated expenses for 2020. But it does increase year per year. For 2021 this rate will increase to 92% and for 2022 to 94% until 2025 the Rürup pension will be tax deductible to 100%.

Example: If you invest € 10,000 in a basic pension in 2020, € 9,000 of this total investment is tax deductible. Pretty good and up to a sum of € 25,046 in total.

Where do you enter private Rürup Rente insurance in the tax return?

You need the Anlage Vorsorgeaufwendungen. Here, write the whole sum very high up in the field "Contributions to certified basic pension contracts“ (so-called Rürup contracts).

Financial Insider: From this € 25,046 you have to discount your contribution of the statutory pension insurance. But it is still a very good deal! 

This tool is very interesting for high earners (paying a lot of taxes) and freelancers.

When opening a private Pension Plan (Riester or Rürup) think that this is a longterm commitment. Work with plans which include investment strategy in the free market as mutual funds and ETF.

Of course you can find many amazing flexible pension plans on the market as well. But flexibility has it price, so these plans have no tax advantages for you now but at the end of the saving time. There are always some tax advantages when providing for the future. Longterm plans are always rewarded in Germany.

I hope this overview helps you to figure out which financial tools work the best, and which ones you want to add to your financial strategy!