Fritz, 53 years old, reduces his workload. The children stand on their own two feet. He steps down. What makes his everyday life a little calmer is of course also reflected in his salary and tax return: his taxable income falls from 90,000 to 80,000 francs. In return, he now pays 2,000 francs less in taxes per year.
Businesswoman Iris, 42, normally pays tax on an income of CHF 130,000. Thanks to a series of one-off deductions, the taxable salary is only CHF 120,000 for one time. In return, she pays 3,000 francs less in taxes.
Fritz and Iris both reduced their taxable income by 10,000 francs, but the tax savings are different. This circumstance can be explained in Switzerland with the somewhat unwieldy term “border tax rate” or “marginal tax rate”. The background is that higher incomes are taxed more heavily in this country. The so-called tax progression ensures that a reduced taxable income is more “worthwhile” for higher earners.
A number everyone should know
The marginal tax rate is calculated for each unit by which income is reduced or increased. The (slightly simplified) examples of Fritz and Iris are as follows:
Since Fritz saves 2,000 francs on 10,000 francs less taxable income, the marginal tax rate is 20 percent – that’s 2,000 francs of 10,000 francs. With Iris there are savings of 3,000 francs and thus 30 percent of 10,000 francs. The marginal tax rate refers to the original income: 20 percent for CHF 90,000 for Fritz, 30 percent for CHF 130,000 for Iris.
This number is important for both of them, as it is for everyone who wants to take a closer look at their finances and assets. The marginal tax rate is easy to find out: In the tax calculator (the one for the canton of Zurich, for example, can be found here), you calculate the tax burden once without and once with the additional reduction. The difference in taxable income is compared to the tax savings. The marginal tax rates calculated in this way vary not only according to income, but also according to place of residence.
If Fritz and Iris were to contact a financial planner with their financial situation, they would calculate the marginal tax rate with emphasis. Because this value helps to save money or to optimize your own financial situation. The marginal tax rate is an important guide to various financial decisions.
Here is an overview:
- Payments into pillar 3a: The payment of currently up to CHF 6,883 per year into Pillar 3a for employees and CHF 34,416 or 20 percent of the net income for the self-employed without a pension fund can be stated in the tax return under “Deductions”. The higher the marginal tax rate, the more you benefit from this deduction.
- Voluntary purchases into the pension fund: Anyone who pays money into the pension fund in addition to the regulated wage contributions can list this in their tax return, as with pillar 3a. In the pension fund, also known as the second pillar or occupational pension scheme, voluntary payments often serve to improve the tax situation. Those with a high marginal tax rate have an advantage. Pension fund purchases are primarily recommended for people over the age of 50. Because then the net benefit is greater than with payments made in earlier years of life. By paying in funds spread over several years, the tax deductions can “break the progression”. If married couples coordinate their purchases, the tax savings can be optimized – completely legal, by the way, and even wanted by the Swiss government. There are considerable opportunities to save on taxes by purchasing pension funds. Theoretically, it is even possible to push the tax burden into the red.
- Maintaining a home: Anyone renovating their own house or condominium can claim this for tax purposes. Here too: renovating in stages over several years reduces the tax burden. The marginal tax rate tells how effective this is.
- Mortgage Amortization: Paying off mortgages reduces the mortgage interest rate. In Switzerland, a mortgage can be taken out for up to 80 percent of a property’s value: As a rule of thumb, two-thirds for the first mortgage, which can be amortized freely, and one-third for the second mortgage, which must be amortized by the time you retire at the latest. When paying off the first mortgage, the marginal tax rate plays a role. With a mortgage interest rate of 1 percent and a marginal tax rate of 30 percent, the net interest costs are 0.7 percent. Anyone who can then invest money with a return of more than 0.7 percent is better off than amortizing it. Because money that is spent on amortization cannot be used for other purposes, such as for investments. And with a reduced mortgage, less debt interest can be deducted from taxable income.
- Financial market investments: Ultimately, the benefit of the marginal tax rate also includes how saved money is used. Returns on investments optimize savings. Investments in stocks have brought significantly more returns than cash assets in accounts in recent years. Now that interest rates are rising and stock markets are suffering valuation losses across the board, this contrast is likely to diminish. However, most financial market experts assume that equity investments will remain a profitable venture in the long term.
The marginal tax rate shows how the tax burden develops when taxable income changes. The examples given here describe how reduced income has an increasingly positive effect the higher the marginal tax rate. Of course, this also works the other way around. If the taxable income increases, one has to pay proportionally more taxes with a high marginal tax rate.
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