More-favourable-treatment check: allowance or tax deduction, the tax office decides

What is the more-favourable-treatment check?

The Altersvorsorgedepot is subsidized in two ways. Either through the allowance, which flows directly into the securities account, or through the special expenses deduction, which lowers your tax burden. You cannot have both. Which route is better for you depends on your income and the number of children, and because both change several times over a working life, the question is not decided once when the contract is signed but answered afresh by the tax office in every single assessment year.

You do not submit an application for this. It is entirely enough to enter the contributions in Anlage AV of your tax return. The rest is handled by the authorities, without you hearing about it again.

How the tax office calculates

First the allowance is paid. It lands in the securities account during the year, independently of your tax return. The tax office then works out how much tax you would have saved if the contributions had been deducted as special expenses instead. If that amount is higher than the allowance, the difference is refunded. If it is lower, the allowance stands.

The allowance is never reclaimed in the process. It stays in the securities account and keeps working there, even if the tax deduction turned out to be the better route.

At what point does it tip in favor of the tax deduction?

The point lies lower than many people think. Without children a marginal tax rate of about 23 percent is enough, and single people reach that on a middling income.

Single, no children, €1,800 own contribution, assessment basis €2,340. Excluding the solidarity surcharge and church tax.

Why children shift the threshold

Every child raises both sides of the calculation. The allowance rises by €300, and so does the assessment basis. But because the allowance counts in full while the deduction only works at your tax rate, the allowance side grows faster. That is why the tipping point moves up.

So for families the tax deduction only pays off at a considerably higher income. As long as the children are eligible for child benefit, the allowance is usually the better route, and with three children it becomes practically unbeatable.

What can go wrong

The more-favourable-treatment check is automatic, but it does not start by itself. Without Anlage AV the tax office checks nothing and the possible refund quietly lapses. At a marginal tax rate of 42 percent that is several hundred euros a year, and nobody will remind you.

The second classic mistake concerns married couples and almost always comes from well-meant tidiness. Each contract belongs in the Anlage AV of the person who took it out, even with joint assessment. Putting both contracts on one form produces a query.

And thirdly, the check needs the right data. If consent to data transmission is missing or the tax identification number is wrong, the allowance does not arrive in the first place. The tax office then does calculate, but with an allowance of zero.

Three examples