Germany’s coalition unveils a €10 billion tax reform aimed at easing burdens for families and middle-income earners.

Germany’s governing coalition has agreed on a sweeping tax reform designed to provide relief for families and middle-income earners. The plan, set to take full effect by 2028, includes measures such as raising the basic tax-free allowance, adjusting tax brackets, and increasing child benefits. The total relief volume is estimated at €10 billion annually.

Key changes include an increase in the basic tax-free allowance from €12,348 to €12,900 by 2028, ensuring that the minimum income required for basic living remains untaxed. Additionally, the threshold for the top tax rate will rise from €69,879 to €70,600, slightly flattening the tax curve for incomes between €17,800 and €70,600.

Families with children stand to benefit significantly. The child benefit will increase from €259 to €272 per month by 2028, and the child tax allowance will also see a boost. For example, a family with two children and a taxable income of €60,000 could save over €600 annually under the new system.

Specific examples provided by the Finance Ministry highlight the impact: a couple earning €2,800 each in gross monthly income with two children would save €632 annually, while a single parent earning €2,800 with two children would save €468. Higher earners, such as a teacher and engineer couple making €5,000 each, could see savings of €678 annually.

To finance the reform, adjustments will be made to the so-called wealth tax. The 45% tax rate will now apply to incomes above €250,000, and a new 47% rate will be introduced for incomes exceeding €280,000. Additionally, the tax deduction for handworker services will drop from 20% to 15%, with a maximum claimable amount of €900 annually. The flat tax rate for mini-jobs will increase from 2% to 5%, and the state-owned KfW bank will contribute €500 million annually to the federal budget in 2027 and 2028.

The federal government has also pledged to compensate states and municipalities for potential revenue losses stemming from the reform. This cooperation is crucial, as income tax revenue is shared between federal, state, and local governments. Lastly, efforts are underway to simplify the tax filing process, with proposals expected by autumn.