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December 1999

Losing Interest

Bad news is on the way for those who wish to save. As of January 1, 2000, the government will dramatically increase the taxation of income generated from capital. With careful planning, however, the worst effects can be avoided. Currently, single people can earn up to DM 6,000 a year in tax-free interest (Zinsen) and dividends. For married couples, the limit is DM 12,000. From next year on, both limits will be halved: DM 3,000 for singles; DM 6,000 for couples. There will also be an automatic tax-free allowance of DM 100 / DM 200 for investment-related expenses. Higher expenses — e.g., bank charges, relevant literature, etc. — must be documented. Under the current laws, assuming the interest rate is at 4 percent, a single person can have around DM 150,000 of savings (couples: DM 300,000) without paying tax on the interest. As of next year, the figures will drop significantly to around DM 75,000 and DM 150,000, respectively. To prevent tax evasion, since 1993, banks and other financial institutions have been obliged to levy a withholding tax (Zinsabschlagsteuer) on interest payments — usually 30 percent. Nonetheless, you can apply to be exempted from this tax by filling in a special form (Freistellungsauftrag) for each institution where you have a savings account. On the form, you must indicate the sum of interest that should be paid tax-free. For example, if you are single and have savings at two institutions, you could currently ask each of them to pay up to DM 3,000 tax-free (or any other combination adding up to DM 6,000). Should your total tax-free interest payments exceed your limit, you must declare them on your annual tax return (Steuererklärung). On the other hand, if too much tax is deducted during the year, you can claim it back. Banks are obliged to inform tax authorities (Finanzamt) of any interest payments they make to you over and above your legal limit. You can also shift your savings away from assets that pay interest to ones that provide most of their return in capital gains — for example, low-interest bonds (Anleihen) or shares (Aktien). However, such investments must now be held for at least a year (previously six months) before the capital gains become tax-free. In the case of real estate, the required time an investment must be held is two years for an apartment or house that you live in yourself, and ten years (previously two) for rented properties. Other tactics include investing abroad, handing over some capital to your children (seek advice first) and selling certain assets early to take advantage of this year’s higher exemptions. For example, in the case of Bundesschatzbriefe Typ B, government savings bonds that run for seven years, all the interest is paid at the end. If you have such bonds due to mature next year, you should probably sell them now. Another important change on the horizon is the taxation of life insurance policies (Lebensversicherung). Currently, payments into such schemes are tax-deductible — in practice, this benefits mainly the self-employed and civil servants (Beamten) — and the lump-sum payments from these schemes are tax-free. The latter rule is set to change for policies taken out after December 31, 1999. To ensure you are not hit unnecessarily by all these many changes, seek advice as soon as possible from your bank or financial advisor. <<<

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