How to Pay 0% Income Tax

At some point this year when I was playing around with my Excel sheet and doing some simulations, something weird happened: I figured out how to pay no income tax while still covering all our expenses.

No, I am not going to talk about some dodgy/illegal tricks. It’s not even a complicated tax avoidance back door where you have to channel your business through far away tax havens.

It’s surprisingly simple.

First, let’s use the German tax system as an example to explain some universal tax-related things:

Personal allowance

In Germany, every person has a personal tax allowance (Steuerfreibetrag or Grundfreibetrag) of 8652€ (value for 2016). This tax allowance grows every year by the way. In 2015, for example, it was 8470€. That means you can earn that much money and pay no income tax on it.

Kinderfreibetrag OR Kindergeld for your kids

Kids’ tax allowance (Kinderfreibetrag): Every kid has a tax allowance of 7248€ (value for 2016). In 2015 it was 7152€.

Don’t get too excited about this, because you might not be eligible it. It depends on your income.

Family allowance (Kindergeld): If you have one or two kids, the family allowance is 190€ per child (for 2016). That’s 2280€/year per child. This money is paid directly into your bank account every month.

There’s a trick here though…you know…Germans like to complicate things sometimes, just to make fun of you: you EITHER get the Kinderfreibetrag OR the Kindergeld. They look at it at the end of the year (in fact when you file your tax return (Steuererklärung)) and give you whichever of the two works out best for you, but not both. This means that they will take the Kindergeld money back from you if it turns out you’ve save more money by getting the Kinderfreibetrag instead. But to complicate matters, they don’t just take the Kindergeld money back out of your account – instead it shows up on your tax return, where you could easily overlook it. Check out this page for more details.

The most importand thing here is that, as a married couple, if your combined taxable income is:

  • Lower than 63,500€, you get the Kindergeld
  • Higher than 63,500€, you  get the Kinderfreibetrag because that’s the level where the tax allowance turns out to be mathematically best for you

In fact, you will receive the family allowance every month anyway, but when the tax authority does your taxes, they will check whether you’re better off with the kids’ tax allowance (called the Günstigerprüfung) and will sort it out for you and if your taxable income is higher than 63,5K, you get some additional money back through tax benefits.

Geeez!…Have a swig of wine. Let it sink in. We still haven’t got to the part about how to pay 0% income tax. Let’s move on. It won’t get any more complicated…I promise!

How can owning real estate help reduce your taxes?

AfA: When you have a rental property in Germany, you can (normally) put at least 2% of the value of the property (less the value of the land it sits on) against your tax each year for 50 years. This is called AfA (Abschreibung für Abnutzung) and there are exceptions/special cases. Do some research into it if you’re interested. It also depends on other things like how old the building is and whether it’s a listed building (Denkmalschutz).

So let’s say you have a flat that you bought for 120K, where 20K is the value of the land and the remaining 100K is the value of the flat itself. Each year, you can deduct 2% of the 100K = 2000€ from your taxable income. This means that an extra 2000€ of your income is not taxed. That’s good.

In our case, since we bought five flats, the cumulated value that is deductible each year as AfA is somewhere around 8500€.

Add to that roughly 4000€ of other deductible expenses like factors (Hausverwaltung), repairs and stuff like that.

The total amount of tax deductions for the flats is about 12500€/year.

Some scenarios for how to pay 0% income tax in Germany with two kids

SCENARIO #1: Have rental properties, two kids and no work

This is just an example calculation, it doesn’t reflect our actual situation. We are married and have two kids. Let’s say all our flats are paid off. We don’t have any sources of income apart from the rent from the flats. That means that apart from managing the flats, I’m free to spend my days scratching my balls, surfing the internet, changing nappies, playing with my kids, entertaining Mrs W, traveling and doing all sorts of other fun, non-money-generating stuff. Let’s say that Mrs W doesn’t earn anything either.

So let’s run the numbers.

What can we throw against our tax? These would be the numbers for 2016:

  • 8652€ tax allowance for Mrs W
  • 8652€ tax allowance for Mr W
  • 12500€ deductions for the rental properties
  • TOTAL: 29804€

That means that if the total profit from our flats was 29,804€/year (our actual real estate income is not much different), we’d pay no income tax at all.

Apart from that, we also get Kindergeld which is not taxable at all:

  • 2280€/year Kindergeld for Little Miss W
  • 2280€/year Kidnergeld for Little W
  • TOTAL: 4560€/year

Income vs. tax analysis for Scenario #1:

1. Real Estate Income29804€
2. Deductible stuff from real estate-12500€
3. Tax allowance Mrs&Mrs W-17304€
4. Taxable Icome (zvE**): 1.-2.17304€
5. Kindergeld (no tax here)4560€
6. TOTAL NET INCOME (after tax)34364€

TAXES: 0€ (nothing, nada, niente, nimic, semmi, rien, nichts, ничего, niets)

Oh shit. Did we just cover all our expenses including my tech toys, smartwatches, all the nappies, low carb meals, health insurance, childcare and even some private pension contributions (which is not even an expense!) from our real estate income and pay no tax AT ALL? We didn’t even do any work all day. Is that legal?

In cases like this, when you hear mythical tax stories that you frankly refuse to believe, just call your favourite tax office (Finanzamt) and simply ask them, telling them your individual situation! That’s what I do when I want to know something about tax for sure. I’m practically on first name terms with the woman who’s responsible for processing our tax return.

But I want to do some work!…What about my 0% tax rate?

SCENARIO #2: Have rental properties, two kids and some work

Let’s add some salt & pepper to this and extend our scenario with some work income.

There’s this thing called a Minijob in Germany where you can be employed part-time and earn up to 450€/month tax-free.

What if Mr & Mrs W decide that they’re bored when the kids are at nursery and they’d like to do something roughly equating to work for a few hours a day. They both find a fun part time job (Minijob) and they each work 30 hours a month. Their hourly rate is a ridiculous 15€.

Income vs. tax analysis for Scenario #2:

1. Real Estate Income29804€
2. Deductible stuff from real estate-12500€
3. Tax allowance Mrs&Mrs W-17304€
4. Minijob 10800€ (no tax on this)
5. Taxable Icome (zvE**), 1. - 2.17304€
6. Kindergeld (no tax here)4560€
7. TOTAL NET INCOME (after tax)45164€

…niiiiiice, 45164€ income…no tax.

SCENARIO #3: Have stockmarket income, two kids and no work

Let’s play the same game, but replace the real estate income with stockmarket and dividends. Here’s the comparison:

When you invest in the stockmarket, you don’t have many tax benefits in Germany. Only the first 801€ of stockmarket income per year per person is tax free. Everything above that is taxed normally. In our scenario we’re using the 801€ two times (for a married couple: 1602€).

Scenario 1 IncomeScenario 1 DeductiblesScenario 3 IncomeScenario 3 Deductibles
IncomeReal Estate: 29804€Stockmarket: 29804€
Deductible stuff from investments-12500€-1602€
Tax allowance Mrs&Mrs W-17304€-17304€
Taxable Icome (zvE**)17304€28202€
Kindergeld (no tax here)4560€4560€
TOTAL NET INCOME (after tax)34364€32218,4€
TOTAL TAX0€2145,60€

As you can see, the fact that you invested in rental properties rather than stocks puts and extra 2145,60€ in your pocket every year (or more precisely, it leaves that sum in your pocket). Obviously, if you’re trying to decide what to invest in you have to consider other risks of both investment types as well. But this is definitely one of the factors you should look at.


We can earn 45,164€ a year, work 30 hours a month, cover all our expenses (about 33K*), set aside 12164€ a year and still pay no income tax. This is a great country!

It was surprising for me how high the tax savings effect of the rental properties turned out to be. Think about it for a minute. While the flats provide you with nice income, they also have a significant tax advantage unlike other inverstments (it’s not enirely passive though).

Obviously, our goal isn’t to pay 0% income tax. These are just example scenarios of what you can throw against your tax, how rental properties impact your tax rate and how to pay 0% income tax here in Germany. Our income is also higher since we continue to work even through we’ve reached FI and we will pay tax on that income. FI doesn’t mean you have to stop working.

And another thing: our estimated average tax rate is going to drop to 8.5-10% in the coming years in a scenario in which our net income is going to be twice as high as our total expenses.

I can imagine that these tax-saving methods exist in some form or other in other countries as well. Feel free to describe how things work in your country. Help other readers!

Do you have any other things that can help you save some tax? Did I miss anything important?

DISCLAIMER: Bear in mind that we’re not experts. In fact, we’re not experts in ANYTHING whatsoever. We write this blog for fun. This is entertainment. We might make mistakes in our posts simply because we might not be informed correctly. We really don’t want you to make wrong financial decisions so, before you do anything: do further research and ask the tax office or other experts.

Read Part 2 of this series here!

*We track our expenses in detail and if our simulations for the coming years are reasonably accurate, these are our approximate annual expenses.

**zvE= zu versteuerndes Einkommen (taxable income). You can calculate your income tax here. This is the number you stick in the tax calculator. The calculator then deducts the tax allowance automatically.