According to the coalition agreement, the federal government is planning a reform of the income tax for married couples and life partners. We explain what’s behind it.
Spouses and registered life partners have a choice when it comes to income tax: you can choose between three combinations of tax brackets – at least so far.
The traffic light coalition of SPD, Greens and FDP wants to abolish one of these three options: The combination of wage tax classes 3 and 5 should no longer exist in the future, according to the coalition agreement. All that remained was the standard mix of tax class 4 and 4 and the combination of tax class 4 and tax class 4 with a factor.
But what’s the point of all this? What would an abolition of tax brackets 3 and 5 mean for couples? And when is it? The answers at a glance.
Why does the traffic light want to abolish tax classes 3 and 5?
If spouses and life partners who are assessed together opt for the wage tax class combination 3/5, they increase their monthly net household income as a couple if their salaries differ greatly (read more about this here).
However, the emphasis here is on “as a couple”, because the lower earner in tax class 5 has high payroll tax burdens. A particularly large amount is therefore deducted from his gross wages. The federal government would like to reduce these deductions by reforming the wage tax and abolishing the combination of tax brackets 3/5. At the same time, the so-called factor method the combination 4/4 (more on this below).
The SPD, Greens and FDP hope that more women will become employed or increase their working hours. Because at the moment it is mostly wives who earn less and are therefore grouped in tax class 5. In this way, they are more heavily taxed than would be the case if they were to tax their income independently of their better-earning partner.
The German Institute for Economic Research (DIW) calculates what that means in figures: “With annual gross wages of 20,000 euros to 35,000 euros, which is the range for most second-earner wives, the additional burden is 11 to 12 percentage points – that’s 200 to 300 euros a month,” says a DIW report. On the other hand, higher earners – often the husband – are favored in tax class 3.
What does an abolition of tax brackets mean for couples?
The abolition of tax brackets 3 and 5 would mean that each partner only pays the wage tax share that he or she also contributes to the joint income. The monthly wage tax burden would increase for higher earners and decrease for lower earners. Overall, however, married couples and life partners would still have to pay the same amount of tax – only the distribution of the burden between the partners would shift.
For those on low incomes, the abolition of tax class 5 would have another advantage: Because they have more net income from the gross every month, dependent wage replacement benefits such as short-time work benefits increase.
Whether it actually encourages women to work more or at all if the tax class combination 3/5 no longer exists is an open question. How important it is to them to pay less wage tax over the course of the year – and thus receive a higher net salary each month – also plays a role.
Effect of the reform still controversial
“The effect on women’s employment is difficult to assess empirically,” says Katharina Wrohlich, head of the Gender Economics research group at DIW Berlin. “In the long term, the wage tax reform should therefore be accompanied by a comprehensive reform of spouse splitting.”
In any case, the abolition of tax brackets 3 and 5 is not an abolition of spouse splitting as a whole. Income tax is also calculated according to the splitting tariff in the remaining income tax class combinations for married couples and life partners.
So consider that Factor method of tax class 4 the splitting benefit already during the year. The tax office first calculates the probable annual income tax liability of the couple. This is then divided by 12 and withheld monthly as income tax. This should largely avoid additional tax payments. However, if you choose the factor method, you are obliged to submit a tax return. You can read more about the factor method in tax class 4 here.
When will tax brackets 3 and 5 be abolished?
The exact date is not yet known. Since the federal government agreed to abolish it in the coalition agreement, it is aiming for the project at least within the current legislative period, i.e. by the next election in autumn 2025. However, experience has shown that not all of the plans from coalition agreements are implemented.
The coalition agreement only says: “In the course of improved digital interaction between taxpayers and the financial administration, we will transfer the combination of tax classes III and V to the factor procedure of tax class IV, which can then be used easily and unbureaucratically and creates more fairness.”
