How is the mother's pension taxed?
In July 2014, the child-raising period for pensioners with children born before 1992 was extended from 12 to 24 months. Instead of one earnings point, two earnings points are now granted as a supplement to the current pension. This means a pension increase of 28.61 Euro (West) or 26.39 Euro (East) per child. How is this pension increase, known as the "Mütterrente", taxed?
- In November 2014, a decree from the Ministry of Finance of Schleswig-Holstein provided - supposed - clarity: The pension increase due to additional child-raising periods is not considered a regular pension adjustment but an extraordinary re-determination of the annual pension amount. Therefore, the tax-free portion of the pension must be recalculated, and the previous pension allowance increased to raise the tax-free portion of the "Mütterrente" (Ministry of Finance Schleswig-Holstein, 10.11.2014, VI 307-S 2255-152).
- The officials from Schleswig-Holstein also provided an example: For a pensioner whose pension began before 2005, the taxable portion - as it was then for the old-age pension - is also 50% for the additional "Mütterrente", i.e., 50% of the pension paid! If the pension began in 2007, the taxable portion is 54%, and the pension allowance is 46%; if the pension began in 2010, the taxable portion is 60%, and the pension allowance is 40%, etc. Finally, a simple solution. This is how PC programs have calculated so far.
- But it would be surprising if the tax authorities did not find a way to make the calculation more complicated and take more money from pension mothers. Indeed, the tax assessments for 2014 unexpectedly show a higher tax share of the pension than previously assumed.
Currently, the Federal Ministry of Finance points out that the increase in the pension allowance is determined not only based on the taxable portion from the year the pension originally began but also on the pension value from which the previous pension allowance was calculated. The relevant year was the year following the start of the pension.
Since the pension value usually changes on 1 July of the year, an average pension value must be determined for the relevant following year. The taxable portion at that time is then applied to this value. The value ratios in the year the pension allowance was first fixed are decisive, and this is the year following the start of the pension (BMF, 23.7.2015).
This means that anyone who has been receiving a pension since 2005 or earlier will only receive the "Mütterrente" tax-free at 50% of the pension value at that time. The fictitious increases in the Mütterrente from 2005 to 2014 are treated as pension adjustment amounts and are fully taxable.
Mrs Maier, who retired in 2007, receives a Mütterrente for one child from 1.7.2014 (1 earnings point x current pension value (West) = 28.61 Euro). Her pension thus increases by a total of 171.66 Euro in 2014 (6 x 28.61 Euro). For the taxable portion, the year 2007 is decisive, and for the pension allowance, the value ratios of 2008 are decisive, so a taxable portion of 54% applies, and the remaining 46% are tax-free.
In 2008, the pension value (West) was 26.27 Euro until 30.6. and 26.56 Euro from 1.7., averaging 26.42 Euro rounded up. Since the average pension value (West) in 2008 was 26.42 Euro, this leads to an increase in the pension allowance of 72.92 Euro ([6 x 26.42 Euro] x 46% tax-free portion). Previously, a pension allowance of 78.96 Euro was assumed (46% of 171.66 Euro).
In 2015, the Mütterrente for one child is 346.92 Euro (6 x 28.61 Euro + 6 x 29.21 Euro), and the pension allowance is 145.84 Euro (12 x 26.42 Euro x 46%).
Currently, with the "RV Performance Improvement and Stabilisation Act" since 1.1.2019, the child-raising period for mothers and fathers whose children were born before 1992 has been further improved and extended from 24 months to 30 months. Instead of 2 earnings points, 2.5 earnings points are now credited to the pension account or granted as a supplement to the current pension, known as "Mütterrente II".
According to the new regulation, the following applies:
- For mothers and fathers who retire from 1.1.2019, the child-raising period is extended by a further 6 months, or the pension entitlement is increased by 0.5 earnings points. Half an earnings point currently corresponds to around 16 Euro (West) and 15.35 Euro (East) per month.
- Mothers and fathers who are already receiving a pension at this time will receive a supplement equivalent to the pension yield of half a child-raising year from 1.1.2019.
- Mothers and fathers for whom a supplement for child-raising from the extension of the child-raising period in 2014 is already included in the pension will receive a supplement increased by half a personal earnings point in the future, provided they raised the child in the 24th calendar month after the month of birth. The regulation is essentially the same as the regulation that took place in 2014 with the extension of the child-raising periods to two years. This flat-rate crediting method is carried out, as was the extension of the child-raising period in 2014, for reasons of administrative simplification so that the pension insurance institutions do not have to reassess millions of pensions (§ 307d para. 1 SGB VI).
- From 1.1.2019, those who did not receive a supplement in 2014 (because they did not have a child-raising period in the pension insurance account in the 12th calendar month) but meet the specified requirements will also receive a supplement to personal earnings points.
- In deviation from the regulations made in 2014 when the child-raising periods were extended, a special right to apply is now intended to provide relief in cases where no supplement to personal earnings points has been received since 1.7.2014 due to child-raising or no supplement to personal earnings points is received with the current extension of the crediting of child-raising periods because it is based on child-raising in a specific calendar month (child-raising in the 12th or 24th calendar month). The new right to apply concerns, for example, adoptions or raising children in Germany after returning from abroad if the adoption or change of residence took place after the 12th or 24th calendar month after the month of birth. However, the prerequisite for recognition is that child-raising periods or supplements are not already credited to other insured persons or survivors for the same child, provided this is actually known to the pension insurance institution (§ 307d para. 5 SGB VI).
- For mothers born before 1.1.1921 who receive a child-raising benefit under § 294 SGB VI instead of child-raising periods, this benefit is also increased by the value of half a personal earnings point. This corresponds to the pension yield from extending the child-raising period by half a year (§ 295 SGB VI).
You do not need to submit a special application to receive the improved benefit. The revaluation of the periods for children born before 1992 is carried out ex officio and does not need to be applied for.
The Federal Fiscal Court has ruled in a recent judgement (file number: X R 24/20) that the pension allowance for a pensioner must also be recalculated and increased if an increase in the current pension is due to the so-called Mütterrente. In this specific case, the claimant received a pension from the statutory pension insurance of 6.726 Euro in the year in dispute, 2014, with her pension increased by one pension earnings point per child due to the Mütterrente for two eligible children.
The calculation of the pension allowance by the Federal Fiscal Court is complex and considers the start of the pension in 2010, the fixing of the pension allowance in 2011, and the fictitious payment of the Mütterrente from 2010. Fictitious ongoing increases in personal earnings points are taken into account, and a new pension allowance is finally determined.
The tax authorities used a different calculation method and considered the average pension value at the first pension receipt instead of reducing the actual Mütterrente by the interim increases in personal earnings points. This led to lower pension allowances.
The German Pension Insurance states that its notifications to the tax offices are correct and that the tax offices have already recalculated the pension allowances. Nevertheless, affected pensioners who disagree with the amount of their pension allowance should contact their local tax office, as only it decides on the amount of the pension allowance.
It should be noted that the tax implications of this recalculation are likely to be minor for most taxpayers. Nevertheless, it is important to ensure that the calculation is carried out correctly to avoid missing out on any tax advantages.
