Clever Change of Tax Class can Raise Parental Benefits

Following two recent decisions of the LSG NRW (December 12, 2008 L 13 EG 40/08 and January 16, 2009 L 13 EG 51/08), married couples are allowed to change into less favorite tax class in order to obtain more parental money. This article will give you hints how this in practice. This can pay out in an increased bottom line for the couple.

The court held it absolutely legal to change the tax class before the birth of a child to increase their parental money (Elterngeld). Such behavior is still covered by the general permissibility to construct one's affairs - which is tax friendly and is not a misuse of the law. Misuse of law in constructing one's legal affairs is not a crime but will be considered when computing your tax assessment. Were changing tax classes not permissible then parliament would not have so written the Statute on Parental Money Elterngeldgesetz. However, these judgments are not yet final because appeal has been made to Federal Social Court as the highest social court in Germany.

The provisions in §2 I, VII BEEG give rise to dispute because the parental money depends on 67% of the average net income of the last 12 months (but only up to € 1,800 / mth with a minimum of € 800). When determining the relevant income from employment, the salary will be reduced by following amounts:

• Wage tax,
• Employee's share on social security premiums,
• 1/12 of statutory flat professional expenses (currently €75)

The basis of calculation is the employer's wage slip. Married couples have the choice to freely determine their tax class when employed.

• Tax class III/V, when the classification is applied by both spouses,
• Both spouses have tax class IV.

The Correct Classification

Often the mother goes on parental leave soon after birth, when she is in tax class V, it might make sense to change the tax classes. This can lead to a higher net income as parental money will increase.

However, a retroactive change is not possible! So take care of this issue in due time! Following §39 V 3 EStG, you can change your tax class once a year but at the latest November 30. Any change will come into force with the next tax year after changing the class.

Usually, the better earning partner has tax class III and with similar income both will have tax class IV. Until the birth of the child, this will in total bring higher net salaries but in the case of parental money this will be negative. However, when the less earning spouse changes into tax class III, the better earning spouse will have less net income - but only temporarily. Your tax return will equalize this negative effect because in the end you only owe taxes proportional to what you earned.

Example: The husband earns monthly € 3,000 gross and via tax class III after deductions he will have appr. € 2,100 net. His wife having a gross income of € 1,800 and via tax class V net € 928. When she remains home after birth, she will get (€ 928 x 67 %) € 621 parental money.

However, when this couple changes their tax classes, she will have € 1,418 net and therefore € 950 parental money. That is a monthly difference gain of € 329! This is not subject to taxation but only subject to progression. And when the child has been born, you should change tax classes again. This change will not effect the state grant!