In recent years, the taxation of accumulating funds has fundamentally changed with the introduction of the advance lump sum (Vorabpauschale). For many investors in mutual funds and ETFs, understanding the current tax regulations is crucial to optimizing their returns when dealing with the taxation of accumulating funds. In this article, we explain the key aspects of the advance lump sum and provide valuable tips on how investors can minimize their tax burden.
What is the Advance Lump Sum?
The advance lump sum is a tax prepayment introduced in 2018 for accumulating mutual funds and ETFs. Taxation of accumulating funds ensures these funds do not distribute their earnings but reinvest them, which previously provided a tax advantage. The advance lump sum ensures these funds are taxed in advance to level the playing field with distributing funds.
How is the Advance Lump Sum Calculated?
The amount of the advance lump sum depends on the base interest rate, set annually by the Federal Ministry of Finance. This rate reflects the yield of a federal bond and serves as a reference for potential earnings of a fund. The calculation for the taxation of accumulating funds is as follows:
- Determining the Base Yield: The base interest rate (as of 01st January 2024 2,29 %) is multiplied by a factor of 0.7 and linked to the value of the fund shares at the beginning of the year.
- Comparison with Value Increase: If the base yield is greater than the actual value increase of the fund, the value increase is taxed as the advance lump sum. If the base yield is smaller, this amount is taxed as the advance lump sum.
Example of Calculating the Advance Lump Sum
Suppose the fund shares are worth €10,000 on January 1, 2024, and €20,000 at the end of the year. The value increase is €10,000, but the base yield (calculated with the base interest rate) is only €160,30. In this case, the base yield is taxed as the advance lump sum within the context of the taxation of accumulating funds.
Who is Responsible for Calculating and Paying the Advance Lump Sum?
The calculation and payment of the advance lump sum are automatically handled by banks and brokers. Investors do not need to worry about the complex calculations related to the taxation of accumulating funds. However, it is advisable to issue an exemption order to utilize the saver’s allowance and save on taxes. As of 2023, the saver’s allowance is €1,000 for single individuals and €2,000 for married couples.
Practical Tips for Investors
- Utilize the Exemption Order: By issuing an exemption order, investors can make use of the saver’s allowance and reduce their tax burden.
- Sufficient Funds on Settlement Account: Ensure there are sufficient funds on your settlement account to avoid interest charges on negative balances.
- Sale of Fund Shares: When selling fund shares, the advance lump sum already paid is deducted from the capital gain to avoid double taxation of accumulating funds.
Conclusion
The advance lump sum has significantly altered the tax landscape for accumulating funds and ETFs through the taxation of accumulating funds. By understanding the regulations and wisely using exemption orders, investors can optimize their tax burden and manage their investments effectively. Stay informed and take advantage of the available opportunities to maximize your capital investments.
