In 1991 the so-called solidarity surcharge was introduced in the Federal Republic of Germany. This is a surcharge on the payable capital gains tax , corporation tax and income tax . Initially, the introduction of the solidarity surcharge was a reaction to the costs that were expected from the reunification of the two German states.
In addition, other reasons were mentioned, such as the Gulf War (Operation Desert Storm) and support for the young democracies in Central and Eastern Europe that were independent after the collapse of the Soviet Union. Initially, a survey took place up to June 30, 1992, but this solidarity surcharge is still in force today.
Since the solidarity surcharge is a federal tax and the corresponding law, there is no need for approval by the Federal Council. The federal government alone is entitled to pay this additional fee. This is levied in both the old and the new federal states and is currently 5.5% of wage tax. But as I said, the solos , as the solidarity surcharge is briefly known, is not only due for income tax , but also for interest and dividends.
Who has to pay the solidarity surcharge?
Basically every German who works and earns money has to pay the solidarity surcharge. But as always in tax law, there are exceptions here too. Low-wage earners do not have to pay the solos or only have to pay a reduced solidarity surcharge.
Are children taken into account when calculating the solidarity surcharge?
Children play a role in calculating the solos. This is calculated by the employer with the registered child allowances and not on the basis of the actual wage tax, but on the basis of a fictitious. Thus, the calculation of the solidarity surcharge is complicated, because in addition to the child allowance, the BEA allowance for childcare, upbringing and training must also be taken into account. It may well be that parents with two children do not have to pay any solos despite tax class III. In 2020, the child tax allowance is 7,812 euros.
How long are you entitled to the child allowance?
Entitlement to the child allowance arises in the month of birth of the child. This lasts as long as the entitlement to child benefit exists. The right to child benefit exists:
- up to the age of 18.
- up to the age of 25, provided that the child is still in training or studying.
- beyond the age of 25 if the child has a disability and is therefore unable to support himself.
The calculation of the solidarity surcharge
The question now is on what basis the solidarity surcharge can be calculated. As before, wage tax plays a decisive role here. In the payroll, the solos are listed below the calculated wage tax and these two items are very closely linked, as the solos are based on the wage tax.
The wage tax depends on the amount (wage / salary) that the employee earns. For example, if they have to pay 1,000 euros in wage tax, an additional 5.5% of this amount will be charged as a solidarity surcharge. That means 1000 euros plus 55 euros solos. Like the wage tax, the employer withholds the solidarity surcharge and transmits the amounts to the tax office.
The tax brackets and exemption limits
The solidarity surcharge only has to be paid above a certain fixed wage tax amount, but after a certain transition period it can very quickly happen that the 5.5% solids are fully deducted.
For example, if the wage tax in tax brackets I, II, IV and VI is below 81 euros, the solos do not apply and in tax bracket III the limit is 162 euros before the tax is due. This means that a low-wage earner does not pay a solidarity surcharge, provided that the wage tax of the single person is not higher than 972 euros per year. For married couples, double the amount applies, i.e. 1,944 euros. Those who are just above this so-called zero zone have to pay a reduced solidarity surcharge, but the tax rate is rising rapidly. This is the case if the wage tax of the single person is over 972 and up to 1,340 euros. For the married couple, the double value also applies here.
Even marginal employees have to pay the solidarity surcharge, but in this case this is levied at a flat rate of 2% when calculating wage tax including solos and church tax.
For the self-employed, the solidarity surcharge is calculated according to the same criteria and is set once a year after submitting the tax return.
What happens to the solidarity surcharge?
Soli was introduced by the Kohl government in 1991 and the money was used to finance reunification. The solidarity surcharge is therefore also a symbol of the rebuilding of the East, but how much money actually flowed into the East is unclear. Because the money from the solos is not earmarked. In addition, the federal government ended the collection of transfer data in 1998.
There were two funding programs for the redevelopment of East German cities: urban monument protection and urban redevelopment east. By 2010, a total of 7.1 billion euros flowed into these funding programs. Dresden alone received 322.2 million euros of this. But the taxpayers’ association has criticized the city for not always handling this money conscientiously. The planning of the Waldschlösschenbrücke alone devoured around 13 million euros! In addition, around 15 billion euros flowed from the federal government into the east German university landscape by 2010, with the European University Viadrina in Frankfurt an der Oder being a prestige property. This university was founded in 1991 to improve German-Polish relations. The university is so modern that even many West German universities are jealous.
It continues with Leipzig / Halle Airport, which is designed for 4.5 million passengers, but only half as many passengers use the airport each year. But a new runway was built for around 416 million euros.
In addition, the project “Transport Policy German Unity” was launched in 1991 and seven major motorway projects were to be financed for around 16.7 billion euros. Today these include the so-called A 20 Baltic Sea motorway, which cost around 1.9 billion euros. But far fewer vehicles than planned use this motorway.
The history of the solidarity surcharge
The constitutionality of the solidarity surcharge has been the subject of controversial discussion for many years and the courts have repeatedly dealt with it. The taxpayers’ association appealed to the Federal Constitutional Court as early as 2006. In 2006, the Federal Ministry of Finance instructed the state finance authorities to only make the tax assessments with regard to the Solidarity Surcharge Act from 1995 onwards until the Federal Constitutional Court has reached a final decision. In 2008, the Federal Constitutional Court failed to issue a resolution not to accept the constitutional complaint for decision. From 2008 the provisional determination of the solidarity surcharge was lifted again.
In an interview in September 2016, Federal Finance Minister Wolfgang Schäuble spoke out in favor of the constitutional phase out of the solidarity surcharge after 2019. His suggestion is that the solos should be phased out in 11 equal installments by January 1, 2030.
Abolition of the solidarity surcharge in 2019
Following the federal election in 2017, the grand coalition agreed in exploratory talks and in the coalition agreement to abolish the solidarity surcharge.
In June 2019 the decision was made: the solos will be partially abolished . From 2021, the solidarity surcharge is to be abolished for 90% of taxpayers. For the highest income groups, the remaining 10%, it should continue to be collected. According to media reports, this will primarily affect companies and the self-employed.
What does that mean exactly now?
Very easily. According to the World Inequality Database, a single person is among the top 10% of earners in Germany if their gross monthly salary is over EUR 4,837 (EUR 58,044 per year). Whose salary is lower and accordingly earns less should not have to pay any more solos from 2021.
This means that the average earner with a gross monthly salary of around 3,000 euros will save 22.75 euros a month in solidarity surcharge in the future. Extrapolated to the year, that’s a proud 273 euros.