Cabinet approves tax reform: basic tax-free allowance 12,564 euros, child benefit 267 euros
The Federal Cabinet today approved the draft for an income tax reform. The basic tax-free allowance, i.e., the portion of income that remains tax-free for everyone, will increase from the current 12,348 euros to 12,564 euros in 2027 and to 12,900 euros in 2028. Child benefit will rise from 259 euros per child per month to 267 euros, and to 272 euros in 2028. The child tax allowance will be increased from 9,756 euros to 10,056 euros and later to 10,236 euros. The employee lump-sum allowance, which allows employees to deduct costs such as commuting to work without providing proof, will increase from 1,230 euros to 1,430 euros.
Relief is primarily targeted at households with low and medium incomes as well as families with children. The top tax rate of 42 percent will in future only apply from 70,600 euros instead of 69,879 euros, which makes the increase in the tax burden between 17,800 and 70,600 euros more gradual. The reform is cross-financed by very high incomes: the 45 percent rate will in future apply from 250,000 euros instead of 277,826 euros, and a new rate of 47 percent will be introduced from 280,000 euros. For work on Sundays and public holidays, the base wage up to which supplements remain tax-free will increase from 50 to 75 euros. In return, the option to deduct craft services from taxes will be reduced. The Ministry of Finance estimates the relief for 2027 at approximately 4.5 billion euros.
The timing is important: the law is not yet in force. The cabinet decision is only the beginning; the Bundestag and Bundesrat must approve it, and the new amounts are scheduled to apply from January 1, 2027. You do not need to apply for anything. The higher basic tax-free allowance will be automatically taken into account via wage tax, and the Family Benefits Office will continue to pay out child benefit. Anyone who has not yet applied for child benefit despite being entitled to it should submit an application to the Family Benefits Office now; payments are only made retroactively for six months. Anyone planning major craft work should factor in the announced reduction in deductibility.