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.

  • Finanzglück

    Nice work, MrW!

    This is by far the most transparent and easiest way I have ever seen, to calculate taxes in Germany. And the result of your calcs makes me speechless. I was always under the impression that this is a high tax country but that is mainly due to the fact that I have paid lots of taxes for a long time due to my income. It will be a totally different story once my we decide to quit our jobs
    and live off our passive income.

    Could you please help me to calculate a scenario for me? I also gave it a try myself but I am not sure if I missed something.

    Let’s assume the following:

    – I want to retire today!

    – I am married and have two kids (like yourself 🙂 ).

    – I have two rental flats that generate 12,000 Euro per year in rent (Nettokaltmiete)

    – Deductible for flats is 3,000 Euro per year (2,500 Euro depreciation plus some costs)

    – All debt is paid off

    – I have a portfolio of stocks/ETFs with an assumed save withdrawal rate of 4%

    Now my question is:

    How large does my stock portfolio need to be, so that I can generate a post-tax income of 30,000 per year?

    My calculations came out at around 350.000 Euro.

    Rental income 12,000 + stockmarket income 14,000 (= 350,000 * 4%) = 26,000

    Deductibles flats 3,000 + deductibles stockmarket 1,602 + tax allowance 17,304 = 21,906

    Taxable income = 4.094

    Tax payable = 287 Euro – is that right? I just assumed 7% tax rate.

    Kindergeld = 4,560 Euro

    Total Income = 26,000 – 287 + 4,560 = 30,273 Euro

    How does this sound to you? Did I miss something?

    Please tell me that this is correct! 🙂 It would mean that previously I have significantly miscalculated the size of the required stockmarket portfolio that I would need to build up.

    • BOOM. This is TAX PORN ladies and gentlemen! Hope you enjoy it. I am!

      I added a couple of other data/assumptions. I think you need about 381K invested in your depot.

      Depot Value 381.000 €


      I1.RE income 12.000 €

      I2.Depot income 15.240 €

      I3.Other income 0 €

      I4.Total income 27.240 €


      D1.RE depreciation 2.500 €

      D2.RE deductible costs 500 €

      D3.RE other non deductibe cost (i.e. Rücklage) 500 €

      D4.Other deductible costs 100 €

      D5.Deductibles Stockmarket 1.602 €

      D6.Total deductibles 5.202 €

      T1.Taxable income (zvE*) (I4-D6) 22.038 €

      T2.Total tax: 774 €

      Tax rate 3%

      X1.Total Income after tax (I4-T2) 26.466 €

      X2.Kindergeld 4.560 €

      X3.RE deductible costs -500 €

      X4.RE non-deductible costs -500 €

      Total Income after tax&expenses X1+X2+X3+X4: 30.026 €

      * Go to, stick your taxable income in the zvE field, select “verheiratet” (married) and press “Berechnen”

      • btw, thanks Nico for your comment!
        One small mistake that you made was that, from the total income, you didn’t substract the costs you have with the real estate (like Verwaltung+Rücklage)

        • Finanzglück

          My pleasure! This is very helpful. I will need to rework my model and take some
          new assumption.

          I actually have one post in the pipeline, where I want to publish an early retirement model from one of my readers. Maybe others can chip in as well so that we can come up with the ultimate FI-Simulation-Excel-Sheet.

          • that’d be grand! I’m a huge fan of this project!

      • I uploaded the excel file I used:


        – If you find any mistakes, please let me know

        – the tax calculation is NOT a formula. It’s hardcoded! If you’re good in excel and know how to calculate the german income tax, it would be FANTASTIC for the whole community to have a nicely automated FI-Simulation-Excel-Sheet!

      • putaristo

        I am not sure, but I think that depot income is taxed with 25% flat (Kapitalertragssteuer/Abgeltungssteuer), with 1602,- deductible for married couples. I don’t think you can mix it with other income.
        Example: if your only income is 8000,- per year depot income, you will have to pay 25% tax, even if your total income is within the tax deductibles.
        It shows that dividend income is only good income for people with a personal tax rate higher than 25%. So rental property it is.

        • if you’re in a lower tax bracket than 25%, you can tell the Finanzamt that your depot should be taxed at the lowe rate too.
          These things are changing though soon. They want to kill the 25% special rate (Abgeltungsteuer) for Dividend income:

    • I uploaded the excel file I used:

      – If you find any mistakes, please let me know
      – the tax calculation is NOT a formula. It’s hardcoded! If you’re good in excel and know how to calculate the german income tax, it would be FANTASTIC for the whole community to have a nicely automated FI-Simulation-Excel-Sheet!

  • Michael Katzmann

    Awesome! Love it 😀

    Are we talking about private income Tax? I thought this can only be made within a corporate structure (Kapitalgesellschaft). Quick question: Lets assume the deductions are higher then the income. Is it possible to take them into the next year?

    However, if you decide to get your assets into a Kapitalgesellschaft (e.g. GmbH) your income tax can be reduced further more. I guess its only worth if you got a really high income… btw. a video that might interest the community :

    Thanks for the Beitrag :-D,


    • Hi Michael! Thanks for your comment.

      “Quick question: Lets assume the deductions are higher then the income. Is it possible to take them into the next year?” – I don’t know. Don’t think so. Does anybody know?

      “However, if you decide to get your assets into a Kapitalgesellschaft (e.g. GmbH) your income tax can be reduced further more.” – i checked out the video. Very interesting but also seems very complicated. I would only consider it if my (work) income would be a lot higher. But if you have links to some scenarios that could be relevant to early retirees (or if you can put something together), feel free to share it with us. Everything that helps us all reaching FI quicker is welcome!

      • Michael Katzmann

        Uhhhh I would love to. I have t found any links yet but will post it here as soon as I find something useful :-D.

        Indeed, I guess it is more relevant if your total income is higher…

        Thanks for the quick response 😀

  • Interesting post. Being my mother is from Germany I am always interested in all things German. I suppose even Germany’s tax system. Where I am in the U.S. it is much harder to live tax free. Our 2015 standard deduction for married couple is $12,600, personal exemption is $4000 for each qualifying person (includes children) so at base only $20,600 would be tax free for a married couple. Rental property can have a yearly depreciation amount based on a Government table against the original purchase price (investment basis) along with mortgage loan interest, and cost of maintenance to reduce taxable rental Income. That rental income is added to total income earned from Salary, Investments, etc. Some parts of the U.S. a couple might be able to live frugally and get by on $20,600 tax free. It is possible but would take embracing simple living and doing so outside a major city or tourist location.

    • thanks for your feedback. At some point I want to make a table with all the tax excemptions per country. Geographic arbitrage can make so much sense and save so much money…Of course tax is not the only factor when you decide where you want to live..


    Awesome job! When reading American FI-Forums I’m quite jealous of their options such as 401K, HSAs, etc. I think the German system needs more such options so people can take care of their own future and set themselves up for financial independence.

    • true. Sometimes I have the feeling that laws that should help investing money for your retirement are made mostly for the financial industry to make money on and not realy for us. If you look at the fees of a riester/rürup/private insurance policies…it’s insane.

  • Dirk

    By the way (although i see it is an only an example)12.500 RE
    deductibles would mean total investment of 700k( including 20
    %Grundstück). 29.804 rental income (without Wohngeld) would be 4,25 %
    return. Not bad bad far away from the 6 to 10 percent you mentioned..

    sum it up: I think 30k for a couple (or 34.500 couple +two kids)means a
    lower income in germany which would cause very low taxes anyway (even
    in another country)If you would`t have kids it would be 2.700 p.a..
    even this amount you woudn´t have to pay because of
    Bürgerentlastungsgesetz which makes you health insurance deductible.
    Maybe you can complete you article in that point, because this
    deductibles for health insurance is a “real present” from the
    In you example you killed the remaining (little ) ax of
    about 2.700 Euro with the RE deductibles. But as mentioned this
    deductible is not for free but only the backside of future costs the
    apartment buildings will produce..

    • 1. “12.500 RE deductibles would mean total investment of 700”. The example above works with 8500€ AfA and the rest of 4K are other deductibles (that includes the factors (Verwaltung) for instance).
      2. You are right, health insurance, and some other deductible costs are not yet covred here but I plan to update the article soon. Any input from you is welcome. For example I will include the 1602€ tax free dividend income. Anything else I didn’t think of?

      • Dirk

        So it is 6 % before tax, well done:-) So what about your health insurance. Because of Bürgerentlastungsgesetz I can put 4.000,- per year PKV against my tax.

        • I know about that, but i don’t know yet what are the max ammounts. And what happens with the kids’ health insurance. Have to read it up.
          The numbers are not exactly real btw. but the calculations should be ok. If they’re not, your corrections are welcome.

  • Dirk

    sorry the first part of my post is missing:
    the 2 or 2,5 % RE deductibles is not for free. If you want to live from rental income for a long time you will have to invest as much as 2 % per year within the next 20-40 year in the building structure. The 20-50 cent/sqm Instandhaltungsrücklage are by far not enough.
    I did also happily only cash in the rents of my berlin apartments for the last 5-7 years investing nothing and refusing any thought about this issue. but the day will come and greater investments in the building will have to be payed off to keep the value of the building. I recommend serious studies about how much 1 sqm per year will cost the owner on the long run..

    • that’s true. I am very aware of the fact that you have to invest in the flats over the years. The RE cash flow have to be solid enough to cover such costs.

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  • Adithyan Ilangovan

    This is incredible to read

    • hey! I’m glad the post was helpful (although it’s by far not complete).
      If you want to see all our posts relatet to RE, you’ll find “Real Estate” in our tag cloud at the bottom of the page:

      all the best!