Tax rate on investment income in FIRE
Taxes
The standard rate on investment income in Germany is 26.375% (25% capital-gains tax + 5.5% solidarity surcharge). This flat rate applies regardless of your other income – as long as your personal marginal tax rate is higher.
In the FIRE withdrawal phase, things often look different: on request in your tax return (Anlage KAP), the tax office checks whether your personal tax rate is lower than the flat 25% – and then applies the lower rate (§32d(6) EStG, "Günstigerprüfung", the favorable-rate check). If investment income is your only income, the effective rate can fall well below 26.375% – or even be zero for small amounts.
This is one of the real tax advantages of FIRE: if you stop working early, your taxable income in the withdrawal phase is often low – and you benefit from the favorable-rate check.
The favorable-rate check in practice:Two allowances apply one after the other: the saver's allowance (Sparerpauschbetrag, €1,000) first reduces your investment income. The remaining amount becomes part of your taxable income – and there the basic tax-free allowance (Grundfreibetrag, €12,348 for singles, 2026) shields your total taxable income from tax. If you only have investment income (no other income), you stay tax-free up to approx. €13,348; above that your personal marginal tax rate applies, which is often far below 26.375%. With other income, the threshold shifts accordingly.
Church tax:If you are liable for church tax, you pay 8% (Bavaria/Baden-Württemberg) or 9% (other federal states) on the capital-gains tax. The capital-gains tax rate is slightly reduced in the process – the total rate still rises to ~27.82% or ~27.99%. In the FIRE context: the favorable-rate check still applies with church tax.
Example (effective rate in FIRE, equity ETF):Person with no other income, €40,000 gross withdrawal at a 60% gain share → €24,000 investment income. For an equity ETF, the 30% partial exemption applies first → €16,800 remain. Minus the saver's allowance (€1,000) = €15,800 taxable income. The basic allowance (€12,348) shields most of it; the remaining ~€3,450 falls into the lowest income-tax bracket (14%). The favorable-rate check applies → the effective tax rate on investment income is well below 26.375%.
