Tax bracket for married couples: III/V, IV/IV, or a multiplier?

What are the different tax brackets?

There are six income tax brackets. The employer withholds income tax monthly based on these brackets (Section 38b(1) of the Income Tax Act (EStG)). For married couples, classes III, IV, and V are particularly important. Married couples are assigned to Class IV if both are subject to unlimited tax liability and do not live permanently apart, even if one spouse does not receive wages. Classes III and V are available only to couples who file a joint application. For classes III and IV, only individuals who meet certain requirements regarding residence or equivalent status are considered to have unlimited tax liability. If one partner lives abroad, this is often the decisive hurdle.

What options are available for married couples?

Married couples in which both spouses earn wages have three options: IV/IV, III/V, and IV with a factor. Under the IV/IV option, each spouse is taxed as a single person according to the basic tax table (Section 39b(2), sentence 6, EStG). Under III/V, Class III is calculated according to the splitting table, and Class V is calculated using a separate formula (Section 39b(2), sentence 7, EStG). Under the factor method, both spouses select Class IV, and the tax office applies a factor that reduces the payroll tax for both by the same percentage.

Why does the tax bracket only affect the monthly income tax?

Payroll tax is an advance payment toward the year’s income tax. The splitting procedure determines how much tax a married couple filing jointly ultimately owes: The tax is twice the amount calculated for half of their joint taxable income (Section 32a(5) of the Income Tax Act). The tax bracket does not factor into this calculation. It merely determines how the advance payment is distributed between the partners and across the months. The tax return adjusts for the difference.

When does III/V result in a back payment?

Under Category III/V, an additional payment may be due at the end of the year if the income tax withheld during the year is lower than the annual tax liability. In the sample calculation above, this amounts to €1,296. This depends on how income is distributed between both partners, the amounts of the pension allowance, child allowances, and other deductions, and whether any tax-free allowances have been entered. The calculation illustrates the principle, not the specific amount for a particular household.

In the case of III/V, a tax return is therefore required: If jointly assessed spouses both received wages and one was taxed under Class V or VI for the entire year or even just a portion of it, a tax return must be filed (Section 46(2)(3a) of the Income Tax Act (EStG)). The same applies if the factor was entered for Class IV. Anyone who switches back from III/V to IV/IV in March must therefore still file a tax return for that year. A tax return is also mandatory for IV/IV if one of the spouses is taxed under Class VI for a second job. Under the factor method, however, the splitting benefit is already taken into account in the withholding tax; more on this in the next section.

What is the factor method?

The factor method is a third option in addition to IV/IV and III/V. Both spouses select Class IV, and the tax office enters a factor (Section 39f of the Income Tax Act). It calculates this factor based on the ratio of the estimated annual tax under the splitting method to the sum of the two income tax amounts under Class IV, rounded to three decimal places without rounding. This factor reduces the income tax for both spouses by the same percentage. The splitting benefit thus takes effect immediately, and neither spouse is disproportionately burdened, as would be the case under Class V. Both spouses must file the application jointly. The prerequisites are that both are subject to unlimited tax liability, do not live permanently apart, and receive wages.

The factor is entered only if it is less than 1. It remains in effect until the end of the year following the year in which it first took effect or was last changed; if your annual wages change, you can request an adjustment. Wages from a second job are not included in the factor calculation.

How do you change your tax bracket?

How does the tax bracket affect parental benefits and unemployment benefits?

Income replacement benefits such as parental allowance, unemployment benefits, and sick pay are linked to your tax bracket in different ways, depending on the benefit. The rules vary for each benefit. You should therefore plan any change in your tax bracket well in advance of taking parental leave or becoming unemployed.