Depending on the source of your passive income, the tax regulations may differ. simpson33 / Getty Images
Passive income enables you to build up a stable side income or even long-term assets.
However, there are a few things to consider when it comes to taxation. Depending on the source of your passive income and how much money you earn with it, the amount of your tax payments differs.
Allowances, the right company form for your activity and depreciation can help you save on taxes.
Passive income allows you to earn extra money without much effort. The idea behind it is that it (almost) generates itself – i.e. without you having to actively work for it as an employee or self-employed. Popular methods for passive income include renting out real estate, investing in stocks or selling your own products in online shops.
If you do it cleverly, you not only generate a stable additional income, but also build up long-term assets. But this path comes with some challenges. One of them is taxation.
In this article, we explain what you should consider when taxing your passive income.
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What is the difference between active and passive income in tax law?
Active income, as defined for tax purposes, is the money that a person receives in return for their time commitment and the physical or mental work they have done. This means your regular income that you receive from your employer as an employee. You pay taxes on this income, the so-called income tax. Their amount depends on how much you earn.
Passive income, on the other hand, is any money that you receive without investing time or work. So it flows automatically – without you immediately exchanging your time for money. The level of your passive income often fluctuates and can even come to a complete standstill depending on how you generate it. However, in terms of tax law, it is a profit on which you have to pay income tax.
How much is the income tax?
According to that Income Tax Act (EStG) income tax is due for the self-employed and non-self-employed if the income falls into one of the following categories:
Income from agriculture and forestry (e.g. animal husbandry and viticulture) Income from commercial operations (e.g. profit shares of the partners) Income from self-employed work (e.g. doctors and auditors) Income from dependent work (e.g. salaries and bonuses) Income from capital assets (e.g Example dividends from shares) Income from renting and leasing (e.g. apartments, office and storage space) Other income within the meaning of Section 22 (e.g. pension)
This regulation also includes the typical types of passive income, such as rental income and dividends.
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Currently the Basic allowance for income tax at 10,908 euros per year. Income up to this amount therefore remains tax-free. If you earn more, taxation begins with a starting tax rate of 14 percent. The more money you earn, the higher the tax rate. From a taxable annual income of 62,810 euros, the top tax rate of 42 percent applies. If you earn 277,826 euros or more annually, the rich tax rate of 45 percent applies.
What tax rules do you have to observe for passive income?
The tax regulations differ depending on the source from which you generate your passive income. We use three examples to explain what you should consider when filing your tax return.
Passive income through real estate
If you generate rental income, you must state this separately in Appendix V under “Income from renting and leasing”. To do this, you first calculate how much money you have earned through the rental. Don’t just think of the pure rental costs, but also of the ancillary costs that the tenant has transferred. From this income you deduct all expenses related to the rental, such as property tax. Then you can tax the passive income from real estate.
That applies to dividends and interest
Capital gains from investments, such as dividends and interest income, are subject to the so-called capital gains tax. You must also state this income in your tax return. In Germany, the capital gains tax is 25 percent. In addition, there may be the solidarity surcharge and church tax.
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For passive income through financial investments, there is an allowance of 1000 euros per year and person. You do not have to pay any capital gains tax up to this amount. Married couples and investors in a registered civil partnership can earn up to 2000 euros per year tax-free. Your capital gains also remain tax-free if your total income does not exceed the basic tax-free allowance of 10,908 euros per year.
At Online Side Jobs it can get complicated
There are many ways to make money online – such as selling products, being a copywriter, or earning money as an affiliate. When it comes to taxation, it depends on whether you generate the passive income as a freelancer or trader. The tax office or the trade/regulatory office usually decides on this based on certain criteria.
If you carry out your work as a freelancer, you may keep simplified bookkeeping. The income surplus calculation, in which you compare the operating income and the operating expenses, is usually sufficient for this. You pay income tax on the resulting profit.
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As a trader, on the other hand, you have to register in the commercial or company register and pay trade tax from an annual profit of 24,500 euros. In addition, you will also have to submit a sales tax return if you do not fall under the small business regulation. You are considered a small business owner if you had a turnover of no more than 22,000 euros in the previous year and the estimated turnover in the current calendar year is 50,000 euros.
How to reduce taxes on passive income?
There are probably few people who enjoy paying taxes. Fortunately, you can use certain methods to reduce your tax burden somewhat.
In the case of real estate, for example, you can deduct the purchase price, the notary costs for the certification of the purchase contract, the brokerage commission and the real estate transfer tax. If you first live in a property yourself and later rent it out, you can also claim depreciation for the remaining useful life from the time of letting.
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Some countries also offer tax incentives if you invest in certain industries and projects. In Romania it is according to the consulting company Rodl and Partners This is the case, for example, in relation to expenses for research & development, dividends and start-up investments.
It is best to consult an expert who will help you to pay tax on your passive income
Setting up a company and choosing a suitable company form can also be worthwhile for tax purposes. Although a sole proprietorship or a partner company is usually the most favorable legal form for tax purposes, especially in the first few years after setting up a business, a corporation such as a GmbH is also an option if the profits are higher.
Many real estate investors set up asset management GmbHs with which they purchase their real estate. The reason: As a result, instead of income tax, a corporation tax is levied on income – and that is only 15 percent. However, it is best to consult an expert before making a decision.
In general, professional tax advice can be worthwhile if you want to generate additional income in the long term. A tax advisor can help you to identify possible tax benefits and minimize your risks. He also makes sure that you tax your passive income correctly.