Mandate for Advanced Payment Updates in Tax Returns: Shifts to Occur in 2025
Revamped Guide on ETF and Fund Advance Payments for Tax Declaration:
Dishing Out Cash for ETFs and Funds:Starting the first banking day of the new year, you'll need to shell out some cash for your ETFs and funds. Here's what you need to know to declare your taxes:
The Lowdown:
Fund investors, get ready! You'll be filling out form KAP-INV for the income tax return due by July 31, 2025, covering the 2024 tax year. The form has been upgraded to a meaty three-pager. As tax guru Maike Bachhaus from Wolters Kluwer puts it, "The form fields previously removed have been reinstated."
Background:
Why's this happening now? Well, due to the negative base rate in 2021 and 2022, no advance payment was collected. But since 2023, it's back, thanks to an interest rate reversal. The German Federal Bank has calculated a 2.55% value for federal bonds with a 15-year remaining term and an annual coupon, based on the interest structure data at the reference date of January 2, 2023.
Number Crunching:
The advance payment amount is calculated by multiplying your fund share value at the beginning of the year by 70% of the base rate, which is derived from the long-term yield of public bonds. A 25% withholding tax, a 5.5% Solidarity Surcharge, and potentially 8 or 9% church tax are also applied. The total tax burden caps out at 27.99%.
Custodian Bank's Responsibilities:
If your custodian bank or fund platform is based in Germany, they're responsible for crunching the numbers and collecting the advance payment. However, it's essential to ensure there's enough cash in your settlement accounts to cover the debit. If not, custodian banks might sell fund shares of equivalent value to pay off the advance payment. This hasn't been a common occurrence thus far. If your custodian is based abroad, it's up to you to handle the correct taxation of your ETFs and funds using form KAP, or else be prepared for tax office fines.
Skipping the Advance Payment:
Here are two ways to dodge the advance payment: First, secure a tax allowance (up to €1,000 for singles, €2,000 for couples) from your custodian, granted it hasn't been claimed elsewhere. For equity ETFs, the allowance is €33 per 10,000 Euro fund volume. Second, no advance payment is levied for ETFs and funds with a negative annual result.
Also see: How high will the advance payment be in 2025
Extra Insights:- In Germany, the advance payment for ETFs and funds is included in each individual's income tax obligations. The tax is usually based on the overall income from investments, including capital gains from ETFs.- Capital gains from the sale of ETFs or funds are considered "other income" and are taxed at the individual's progressive income tax rate, which can go up to 45% plus the 5.5% Solidarity Tax.- If you hold ETFs or funds for over a year, the gains are tax-free, similar to the treatment of cryptocurrencies and other investments.- The advance payments for income tax in Germany are generally based on the previous year's tax liability. Individuals must file an advance payment return if their previous year's tax bill exceeds €400, and the advance payment is usually one-third of the last year's tax, due quarterly. For specific details on the advance payment calculation, consider consulting a tax professional or reviewing the latest German tax regulations.
In the revamped guide for ETF and fund advance payments, it's noted that fund investors will be filling out form KAP-INV for the income tax return due in 2025, which covers the 2024 tax year. This form, previously truncated, has been expanded to a three-pager due to reinstated field additions (personal-finance). For those investing in ETFs and funds, it's essential to understand that the advance payment is calculated based on the fund share value at the beginning of the year, multiplied by 70% of the base rate, which is derived from the long-term yield of public bonds, and may be subject to various taxes such as withholding tax, Solidarity Surcharge, and church tax (investing, finance).
