How to apply for child leave orders and what it entails

Saving Money

Nothing is safe from the tax office. This also applies to potential capital gains for your children. Fortunately, provisions are also available for children. However, these are not automatically taken into account. You must file the relevant waiver orders for your child yourself. Otherwise, potential capital gains such as interest will be deducted directly by your bank as capital gains tax and passed on to the tax authorities.

What are capital gains?

If you save and invest money for your children, there will be capital gains. Examples of capital gains are:

  • Interest on savings deposits
  • earnings
  • Gains on stocks

It is subject to capital gains tax, which is calculated directly by banks and withholding for tax authorities. Tax which is paid directly at the place where it arises is called withholding tax. Another example is the wage tax, which is paid by the employer directly to the tax office.

Since its introduction in 2009, the final withholding tax has been the separate name for capital gains tax and is taxed at 25%. An additional solidarity fee is also payable. If you belong to a religious community, you must also pay church tax. The amount of the church tax rate depends on the state.

However, each investor has an allowance (also known as a “savings premium”) that he or she can claim against that income. The amount is currently €801 for a single assessment and €1602 for couples assessing together. Your kids also have an allowance that you should definitely use for them. However, the child must also be listed as the account holder.

What should be considered when applying for a leave of absence for a child?

By issuing an exemption order, investment accounts are subject to the control of tax authorities.

In order to prevent abuse in the form of distributing parental assets to children’s investment accounts for the use of tax credits, the Tax Office pays close attention to ensuring that funds or investments in children’s accounts are truly intended for children or their purposes. In short, parents can park money in their children’s accounts to misuse their allowances for their own capital gains.

It should be noted that child support expenses are not paid out of a savings account. Caution is advised when it comes to school fees or class trips. If parents use children’s assets to support them, they use them for themselves from the point of view of the tax authorities.

The situation is clearer with completely inappropriate purchases: for example, if you used money from a child’s account to renovate the bathroom or buy a car, the tax office will ask you uncomfortable questions. In either case, the loss of tax benefits is at stake.

Multiple accounts for kids – what to do?

Oftentimes, your kids will have a savings account and an investment account for bonds, stocks, mutual funds, and ETFs. Accounts are often with different providers. Estimate the investment income for the year as the provision is apportioned accordingly to the service providers.

You must then create a separate exemption order for your child for each bank. Ensure that the sum of the individual ‘partial’ allowance does not exceed €801.

In a glance:

  • Capital gains such as interest, dividends and price gains realized on shares are subject to withholding tax.
  • They can be exempted from taxes of up to €801 per person or €1602 if they are jointly assessed with one or more exemption orders.
  • A separate waiver order must be submitted for account holders under 18 years of age.
  • Capital gains in excess of the allotment are taxed at 25% withholding tax plus soli and, if applicable, plus church tax.
  • This also applies to all income without an exemption order.

In order for your children to use the provisions, they must generate investment income from bonds, stocks, funds, and ETFs, for example. You need a repository for this.

Have you already thought about opening a repository? We show you what they are and what are their advantages:

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Image Credit: Getty Images / macniak

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