Freigrenzen

What Is Freigrenzen?

Freigrenzen are specific thresholds within Steuerrecht that, if exceeded, result in the full amount subject to taxation becoming taxable, rather than just the amount above the threshold. This differs significantly from a "Freibetrag" (tax allowance), where only the amount above the allowance is taxed. Freigrenzen serve to simplify tax administration for minor income or gains and to relieve taxpayers from minimal tax burdens that would otherwise arise. They are a crucial component of tax systems designed to balance administrative efficiency with tax fairness, particularly within areas like personal income and certain types of capital gains or business income.

History and Origin

The concept of Freigrenzen in German tax law has evolved alongside the broader development of the country's taxation system. These thresholds are typically introduced or adjusted as part of comprehensive tax reforms aimed at reducing bureaucratic burden, stimulating economic activity for small-scale ventures, or adapting to changing economic conditions. For instance, the Freigrenze for private sales transactions, such as the sale of assets like precious metals or cryptocurrencies held for less than a year, has seen adjustments over time, with a significant increase from €600 to €1,000 taking effect in 2024, as outlined in § 23 Abs. 3 Satz 5 EStG. Such¹⁰, ¹¹ changes reflect legislative efforts to modernize the tax framework and provide relief for smaller gains, acknowledging the administrative effort involved in taxing very small amounts. Another prominent example is the Freigrenze for the "Solidaritätszuschlag" (solidarity surcharge), which was substantially reduced for most taxpayers from January 1, 2021, with subsequent increases to the Freigrenzen in 2023 and 2024, exempting a large portion of taxpayers from this surcharge.

K⁹ey Takeaways

• Freigrenzen define a maximum amount of income or gain that remains entirely tax-free.
• If the actual amount exceeds the Freigrenze by even a small margin, the entire amount becomes subject to Besteuerung.
• They are commonly found in areas such as private sales transactions, minor income sources, or certain tax surcharges.
• The purpose of Freigrenzen is to simplify tax administration and provide relief for small-scale financial activities.
• Understanding the distinction between Freigrenzen and Freibeträge is crucial for effective Finanzplanung.

Interpreting Freigrenzen

Interpreting Freigrenzen requires a precise understanding of their "all or nothing" nature. Unlike a Freibetrag, where only the portion above the allowance is taxable, a Freigrenze means that if the defined limit is crossed, the entire sum (from the first euro) is subject to Steuern. For instance, if a Freigrenze is set at €1,000, and a taxpayer realizes a gain of €999, no tax is due. However, if the gain is €1,001, the full €1,001 becomes taxable. This characteristic necessitates careful tracking of income and Gewinn amounts to avoid inadvertently triggering a full tax liability.

Hypothetical Example

Consider Anna, a freelance graphic designer who also occasionally sells digital art online as a private side activity. For this private selling activity, assume there is a hypothetical Freigrenze of €500 per year for income from minor private sales that are not considered a business.

In Year 1, Anna sells several digital artworks, earning a total Gewinn of €450 from these private sales. Since her total gain of €450 is below the €500 Freigrenze, she does not have to pay any Steuern on this income.

In Year 2, Anna's digital art becomes more popular. She sells numerous pieces and her total gain from private sales reaches €501. Because her total gain of €501 has exceeded the €500 Freigrenze, the entire €501 becomes taxable. She cannot claim the first €500 as tax-free; instead, the whole amount is subject to her individual Einkommensteuer rate. This scenario highlights the critical impact of even a small overshoot when dealing with a Freigrenze.

Practical Applications

Freigrenzen are applied in various areas of German Steuerrecht to streamline processes and grant limited tax exemptions.

One common application is in the context of private sales transactions (private Veräußerungsgeschäfte) as defined by § 23 EStG. Gains from the sale of certain assets (like art, jewelry, or cryptocurrencies, but generally not daily use items) within a speculative period (usually one year) are tax-free if the total Gewinn in a calendar year does not exceed the Freigrenze, which was raised to €1,000 from 2024. If the gain exceeds this amount, the ent⁷, ⁸ire gain is taxable.

Another significant area is the "Kleinunternehmerregelung" (small business regulation) under § 19 Umsatzsteuergesetz (UStG). This regulation simplifies the Umsatzsteuer (value-added tax) for small businesses. As of January 1, 2025, a business is considered a small enterprise if its total revenue in the previous calendar year did not exceed €25,000 and is not expected to exceed €100,000 in the current year. If these Freigrenzen are met, the business ⁵, ⁶is exempt from levying and reporting Umsatzsteuer, significantly reducing administrative burden. However, if the current year's revenue exceeds €100,000, the business becomes subject to Umsatzsteuer from the point of exceeding the threshold.

Furthermore, Freigrenzen historically (and p³, ⁴artially still) play a role in the "Solidaritätszuschlag" (Soli), a surcharge on Einkommensteuer and Kapitalertragsteuer. Since 2021, the Soli's application has been significantly curtailed for most taxpayers due to raised Freigrenzen, meaning only those with higher tax liabilities continue to pay it. These examples illustrate how Freigrenzen are ¹, ²used to define boundaries for specific tax treatments across different income types and business scales within Germany.

Limitations and Criticisms

While Freigrenzen aim to simplify tax matters for smaller sums, they are not without limitations and can lead to certain criticisms. The "all or nothing" principle, which defines Freigrenzen, can create a cliff effect. A taxpayer whose income or Gewinn marginally exceeds the Freigrenze faces a disproportionately higher tax burden compared to someone just below it. This can discourage individuals or small businesses from slightly increasing their economic activity if it means crossing a Freigrenze and losing the entire exemption, potentially leading to inefficient economic behavior. This effect contrasts with Freibeträge, where the incentive to earn more is generally maintained, as only the excess is taxed.

Another criticism is the complexity arising from different Freigrenzen applying to various types of income or assets. Navigating these multiple thresholds requires taxpayers to meticulously track different income streams and expenses, which can still be a significant administrative task. For example, the rules for private sales of certain Anlageprodukte or assets might have one Freigrenze, while a different one applies to certain incidental income. This fragmentation can complicate Steuererklärung processes, particularly for individuals with diverse income sources. Furthermore, the arbitrary nature of the exact threshold values, which are set by legislation and can change, can be seen as a limitation, as they may not always perfectly align with economic realities or Inflation.

Freigrenzen vs. Freibeträge

The terms Freigrenzen and Freibeträge are often confused but represent distinct concepts in Steuerrecht. The fundamental difference lies in how tax liability is calculated when a specified threshold is crossed.

A Freigrenze allows an entire amount to remain tax-free up to a certain limit. However, if this limit is exceeded by even a small amount, the total sum becomes fully taxable from the first euro. This creates a "cliff effect," where a minor increase in income or Gewinn can lead to a significant increase in tax liability. Examples include the Freigrenze for private sales transactions or, historically, certain minor income sources.

Conversely, a Freibetrag also specifies an amount that remains tax-free, but if the income or gain exceeds this amount, only the portion above the Freibetrag is subject to Besteuerung. The amount up to the Freibetrag always remains tax-free. Common examples include the basic income tax allowance (Grundfreibetrag), the "Sparer-Pauschbetrag" for Kapitalertragsteuer, or specific allowances for children. This "gradual effect" is generally considered less penalizing than the "all or nothing" nature of Freigrenzen, as it prevents disproportionate tax increases for marginal gains.

FAQs

What happens if I go over a Freigrenze?

If your income or Gewinn exceeds a Freigrenze, the entire amount, from the very first euro, becomes fully taxable. You do not get to keep the amount up to the Freigrenze tax-free.

Why do Freigrenzen exist?

Freigrenzen exist primarily to simplify tax administration for small amounts and to relieve taxpayers from minimal tax burdens. They are designed to avoid the disproportionate effort of taxing very small incomes or gains, thereby increasing efficiency within the Steuerrecht system.

Are Freigrenzen the same as tax deductions?

No, Freigrenzen are not the same as tax deductions. A Freigrenze determines whether an entire income or gain is tax-free up to a certain point. Tax deductions, on the other hand, reduce your taxable income, meaning they lower the amount of income on which you have to pay Steuern.