In Germany, parents are financially supported by the state after the birth of a child under certain conditions so that they can take time to care for and raise their child. This so-called parental allowance is intended to promote the equal division of labour and family work in the interests of gender equality and the compatibility of work and family life. The parental allowance amounts to up to EUR 1,800 per month with a maximum entitlement of 14 months (provided both parents are involved). In total, this means an economic advantage of up to 25,200 net.
Stricter requirements apply for births from 1 April 2025
In addition to other requirements, the standardised Income limit in the amount of EUR 175,000 (taxable income; zvE) for couples and single parents in the year before the birth. If this limit is exceeded, parents are not entitled to parental allowance. The decisive factor in each case is the taxable income in the Calendar year before the birth of the child.
Taxable income must be distinguished from gross income (it depends on the taxable income in the tax assessment notice). When calculating this, deductions are made from the total amount of income (e.g. from self-employment or employment, rental income, etc.):
- Special expenses,
- Pension expenses,
- individual allowances and
- extraordinary burdens.
Tax optimisation of taxable income ("zvE")
In order to reduce taxable income, the following selected options can be examined individually in practice. As it depends on the calendar year before the birth, forward planning is recommended.
a) Timing of the inflow of wages or other (surplus) income
Due to the so-called inflow-outflow principle (standardised in Section 11 EStG), income in the area of surplus income is generally attributable in the year in which it economically accrues to the taxpayer. The taxpayer can agree the inflow of wages with their employer in advance. Many employers have individual agreements regarding the inflow of wages, for example in the form of "sabbatical policies" (reduction of wages in the savings phase, payment of wages in absence) or long-term work accounts - as a result, the wages are paid in a later year. In addition, there are agreements in which wages are exchanged for holiday (e.g. "bonus for holiday") - in practice, such agreements allow the employee to choose between a bonus payment (which increases the target income in the current year) or additional days of holiday. In addition, the inflow of special payments such as severance payments should also be planned.
b) Tax losses from other types of income, for example from letting and leasing (real estate)
The total amount of income is first determined as a preliminary step to the zvE. The total amount of income includes both positive and negative income, e.g. from self-employment and employment, from letting and leasing or income from business operations. Consequently, (tax) losses from the letting and leasing of property can be used to offset income from employment (wages) and reduce taxable income below the relevant threshold. In practice, tax losses can currently be generated or income reduced from special depreciation for the construction of new rental flats (for buildings with a KfW 40 QNG energy standard; for further requirements, see Section 7b EStG), from depreciation for listed buildings (Section 7i EStG) and from high depreciation based on proof of a short remaining useful life by means of an expert opinion (Section 7 (4) sentence 2 EStG).
c) Advertising expenses
Income-related expenses reduce the income and therefore contribute to the reduction of the income from employment. Examples of this can be expenses for work equipment, double housekeeping or further training (such as expenses for a Master's degree programme).
d) Investment deduction amount ("IAB")
In special cases, the zvE can be reduced by recognising an investment deduction amount ("IAB"). The investment deduction amount (IAB) in accordance with Section 7g EStG enables small and medium-sized companies to deduct up to 50 % of the planned investment costs for depreciable, movable assets as a business expense for tax purposes before the actual acquisition (a maximum of EUR 200,000 per company can be deducted immediately). The deduction immediately leads to a lower tax burden and provides liquidity for the planned investment. Only movable and depreciable assets that are used almost exclusively for business purposes are eligible. In addition, the profit of the business must not exceed EUR 200,000. If the planned investment is not realised within three years, the deduction must be subsequently reversed and added back to the profit for tax purposes. In practice, investments in larger PV systems are regularly used here (from a tax perspective, the operation of a PV system constitutes a commercial business; please refer to Section 3 No. 72 EStG for the minimum size of PV systems required for this).
e) Rürup one-off amount
The so-called Rürup pension is subject to some criticism (low flexibility, i.e. no access until the start of retirement, no capital option, no inheritability, tax burden on pension payments due to deferred taxation, non-cancellability and contract commitment, no state allowances, return risks and costs). Nevertheless, contributions paid can reduce the zvE as special expenses (for single persons, the maximum amount for all pension expenses including contributions to statutory pension insurance or occupational pension schemes is EUR 29,344 in 2025). Contributions can often be paid flexibly - for example, as a one-off contribution in December of the current year.
f) Deferred compensation company pension scheme ("bAV")
For many taxpayers, the conversion of gross salary into occupational pension contributions also contributes to the reduction of the zvE. For example, in 2025, occupational pension contributions totalling EUR 7,728 can be made tax-free by the employer. By means of deferred taxation (payments at retirement age are fully taxable), the aim of achieving a tax shift to a lower progression bracket after working life can be achieved. However, this is not certain, as the progression level in retirement is often underestimated due to rising pensions, for example. In any case, deferred compensation (in the savings phase) can make a contribution to reducing the zvE.
g) Voluntary advance payment PKV
Voluntary advance payment of contributions to private health insurance and long-term care insurance can make a small contribution to reducing the zvE, at least for the portion of the so-called basic provision. Contributions paid for basic provision can be deducted to an unlimited extent. As a side effect, many health insurance companies grant a discount for voluntary advance payment of contributions. In addition, the maximum annual amounts for the tax deduction of other pension expenses can then be regularly used for other pension expenses in subsequent years and are not already exhausted by the basic pension.
h) Donations
Donations (for charitable, benevolent or ecclesiastical purposes) reduce the taxable income as special expenses. For employees, a deduction of up to 20% of the total amount of income is possible. In practice, (additional) donations may be advisable for tax reasons if the income limit of EUR 175,000 zvE is already within reach.
The explanations presented represent No individual tax advice and do not replace an individual examination.
Yours TAXGATE Team supports wealthy private individuals and family businesses with complex tax issues and represents their interests vis-à-vis the tax authorities.
