Why do I get less on the tax refund than my colleague?

This is one of the most frequent questions our clients ask. The reason is that it always seems unfair when a colleague gets back more tax with the same or similar salary as you. However, there are many reasons why this happens.

Comparing two refunds in not the right thing to do

Let’s start with this: comparing refunds is like comparing the change you get back at the supermarket when you bought different things and paid different amounts. It is meaningless unless you pay attention to the details.

When you look at all other information and compare income, deductions, credits, tax liability, and tax paid, you will see that these two situations are very different in taxation.

What ELSE can play a role?

Your salary and paid tax are only the tip of the iceberg. Other factors are the deductions, tax credits, and estimated tax payments which can determine the amount of your refund or the amount of your debt.

First of all, your annual income tax calculation starts with ALL taxable incomes for the given tax year. So, your salary might be very similar to your colleague´s but your ALL taxable income might be higher than his. Your other incomes can include your interest, dividends, capital gains or losses, unemployment, retirement distributions, social security, rental income, small business income, alimony, gambling winnings, spouse’s salary, and your worldwide income.

How can a person lower the taxes?

Depending on your life-situation you may further increase the refund including deductions which can lower your “taxes”. These deductions can be your moving and travel expenses to your work abroad, accommodation costs if you have a double household, e.g. you pay for household abroad and also in your local country, student loan, paid alimony, and others, that your colleague does not have.

The resulting adjusted gross income is then reduced by either a standard deduction or your itemized deductions. Lastly, your withholding tax payments and refundable tax credits are applied against your total tax. In case you paid less, there is a debt to pay and if you paid more than your tax, then you get a refund.

Example 1:

Let’s say David earned 36 744 EUR and paid 5496 EUR taxes in Germany in year 2019. His friend and colleague Fabio earned 35 155 EUR and paid 6186 EUR tax. Both are married, without any deductions or income outside of Germany.

David can get a refund of 3266 EUR, but Fabio 4450 EUR. There is only a slight difference in the income and paid taxes but it can still have a huge impact on the refund.

Why?In this case, it is very probable that the employer deducted different amounts of tax every month. That is the reason why Fabio gets more on taxes back.

Example 2:

Let’s say David earned 36 744 EUR and paid 5496 EUR taxes in Germany in year 2019. His friend and colleague Fabio earned exactly the same amount of 36 744 EUR and paid 5496 EUR at the same company. Both married, but Fabio has 2 children back home in Romania and a wife without any income while David has no kid and his wife had a high income in Romania.

David can get a refund of 3266 EUR depending on the high income of his wife, but Fabio around 4500 EUR. There is no difference in the income and paid taxes but still, they get different amounts of refunds.

Why?In this case, Fabio can deduct the cost of childcare (or other family-related benefits) while his wife had no income and that is the reason why Fabio gets more on taxes back.

According to the facts above it is very unlikely to find a completely same case.

Consulting with our company can help you to pay the lowest tax legally allowable while keeping you up to date on the changing tax laws.