Don't forget exemption orders - easily secure tax-free interest income

In the complex world of personal finance, exemption orders offer a straightforward yet highly effective way to exempt interest income and other capital gains from immediate taxation up to a certain limit. Many savers underestimate the potential of this simple measure or overlook its regular updating. However, especially in the current interest rate environment, where savings and investments yield more attractive returns, the strategic use of exemption orders is gaining importance.

By correctly submitting an exemption order to your bank or broker, you ensure that your earnings are not subject to capital gains tax up to the full extent of the saver’s allowance. This not only saves you the hassle of reclaiming overpaid taxes through your annual tax return but also allows you to reinvest the full yield immediately and thus benefit from the compounding effect. It is a proactive step towards optimizing your personal financial strategy.

Capital Gains Tax and Favorable Assessment

The capital gains tax was introduced in Germany to simplify and standardize the taxation of capital gains. It is a flat rate of 25 percent plus a solidarity surcharge of 5.5 percent on the capital gains tax (effectively 26.375 percent) and, if applicable, church tax. This tax is withheld directly by banks and financial institutions on capital gains such as interest, dividends, and profits from the sale of securities and is paid to the tax office. For savers, this means that a large part of their earnings is taxed before payment.

For taxpayers whose personal income tax rate is below 25 percent, the legislator offers the option of a so-called favorable assessment. In the context of the annual income tax return, it can be requested that the tax office checks whether taxing capital gains at the individual, lower income tax rate would be more advantageous for the taxpayer. If this is the case, the capital gains tax is adjusted in favor of the individual tax rate. The favorable assessment is thus an important tool to avoid over-taxation, but it requires an active application.

Saver’s Allowance and Exemption Order

The saver’s allowance, often referred to as the saver’s exemption, is a legally defined limit for capital gains, up to which these remain tax-free. From the year 2023, this amount is set at 1,000 euros for single individuals and 2,000 euros for married couples and registered life partners who are assessed jointly. This flat rate takes into account various advertising costs related to capital gains in a lump sum and does not need to be substantiated by individual receipts. Every euro of capital gains that falls below this limit is thus fundamentally exempt from capital gains tax.

This is where the exemption order comes into play: it is the necessary instruction to your bank or financial institution to consider this saver’s allowance when paying out your capital gains. Without an effective exemption order, the bank will withhold capital gains tax directly, even if your earnings are below the exemption limit. Therefore, it is not automatic that the saver’s allowance is applied; it must be actively claimed through the exemption order to prevent direct taxation of earnings within the exemption limit.

Simply Divide Exemption Orders

Many investors maintain accounts and portfolios with various banks, savings banks, or online brokers. It is important to understand that the saver’s allowance of 1,000 euros (or 2,000 euros for joint assessment) applies per person and calendar year – and not per bank account. This means you can divide your entire exemption amount among several institutions, but you must ensure that the total of all exemption orders does not exceed your personal maximum amount.

The division is straightforward: for example, you can issue an exemption order for 500 euros at Bank A and another for 500 euros at Broker B if you are single and expect annual capital gains in this range. This flexibility allows you to optimally allocate the exemption amount where the highest capital gains are likely to occur or distribute it evenly across all your investments.

Regularly reconciling and adjusting your exemption orders is essential, especially if your investment strategy changes, you open new portfolios, or close old ones. A clever division not only prevents unnecessary tax deductions throughout the year but also ensures that you fully utilize the tax benefits you are entitled to and maximize your capital gains. If the total of your exemption orders exceeds the saver’s allowance, the bank is legally required to report this to the Federal Central Tax Office.