Income tax basics for employees in Germany: the annual tax return and deductible expenses

What you will learn

• How wage tax relates to income tax and why a tax return can lead to a refund
• When employees must file and the general deadlines
• The main deduction groups and the 2026 values for common allowances
• How to estimate the effect of extra deductions using your marginal tax rate

Explanation

Wage tax (Lohnsteuer) is an advance payment on income tax (Einkommensteuer). Your employer deducts it every month based on your tax class and standard allowances. The final income tax is only calculated after the year ends, in the assessment (Veranlagung) based on your income tax return (Einkommensteuererklärung). If your real deductible costs are higher than the standard allowances, you may get money back.

Must I file?

Many employees file voluntarily. Filing is generally mandatory in certain cases, for example with tax classes III/V or IV with factor, side income above €410 that was not taxed via payroll, wage replacement benefits above €410 (such as parental allowance or short-time work allowance), or several employers at the same time with tax class VI. Without a tax adviser the general deadline is 31 July of the following year; with an adviser it is later. Late filing can lead to a late-filing surcharge. Voluntary returns can usually be filed up to four years later. Returns are filed online via ELSTER, the tax administration's portal.

Key terms

• Basic tax-free allowance (Grundfreibetrag): income up to this amount is not taxed. For 2026: €12,348 for single persons, €24,696 for married couples filing jointly.
• Work-related expenses (Werbungskosten): costs you have because of your job. Every employee automatically gets the employee lump sum (Arbeitnehmer-Pauschbetrag) of €1,230. You only benefit from listing expenses if they total more than this.
• Special expenses (Sonderausgaben): for example pension and health insurance contributions, church tax, donations.
• Extraordinary burdens (außergewöhnliche Belastungen): for example high medical costs above a reasonable personal share.
• Household services and craftsmen (§ 35a EStG): a share of labour costs (not materials) reduces the tax directly; you need an invoice and a bank transfer, not cash.

Common work-related expenses

• Commuting allowance (Entfernungspauschale): from 2026, €0.38 per kilometre of the one-way distance from the first kilometre, per working day travelled.
• Home office lump sum: €6 per day worked from home, up to €1,260 per year. As a rule, a day counts for either commuting or home office, not both.
• Work equipment, professional training, union fees, job application costs, some moving costs.

Marginal versus average rate

Your marginal tax rate is the rate on your last euro of income. A deduction lowers taxable income, so its value is roughly the deduction × your marginal rate. The average rate (total tax ÷ total income) is always lower and is the wrong number for this estimate.

Worked example

Hypothetical example: Jonas is single, works full-time and in 2026 commutes 18 km one way on 210 days. He also works 40 days from home, spends €180 on work tools and books used almost only for work, and pays €220 in union fees. Assumption: marginal income tax rate 30%. Excluded: solidarity surcharge, church tax and other deductions.

1. Commuting: 18 km × €0.38 × 210 days = €1,436.40
2. Home office: 40 days × €6 = €240
3. Total work-related expenses: €1,436.40 + €240 + €180 + €220 = €2,076.40
4. Amount above the lump sum: €2,076.40 − €1,230 = €846.40
5. Estimated tax effect: €846.40 × 30% ≈ €253.92

Only the €846.40 above the lump sum creates an extra benefit, because the €1,230 was already considered in his payroll tax.

Common mistake

Practice activity

Case A: Mira commutes 25 km one way on 200 days in 2026 and has no other work-related expenses. Her marginal rate is 25%. Calculate her commuting allowance, the amount above the lump sum and the estimated tax effect. Case B: Tom commutes 8 km on 200 days. Does listing his commute help him?

Key takeaways

• Wage tax is an advance; the tax return calculates the final income tax and can lead to a refund.
• Some employees must file, for example with tax class III/V or side income above €410; the general deadline without an adviser is 31 July of the following year.
• Work-related expenses only help above the €1,230 lump sum; estimate their value with your marginal rate.
• Keep receipts and records all year so the return takes hours, not days.

Next step

In the next lesson you will look at spending behaviour: lifestyle inflation, impulse purchases and subscriptions that quietly drain your budget.