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Created on Monday, 03 October 2011 18:13

Last Updated on Friday, 28 December 2012 18:52

Deducting Education Costs - Now in Full

The BFH dropped two new precedents (re VI R 38/10 and VI R 7/10, judgments of July 28, 2011) that have a significant impact for younger persons - to their advantage. Costs for first studies or vocational training are permitted for deduction! Continue reading for all the commotion!

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In one case, a pilot sued in court to be allowed to deduct costs around € 28 k. His argument was that the training costs were comparable to anticipated professional expenses for his future job as a pilot. In the other case, a medical student sought legal recourse. Their local tax offices as well as the lower tax courts did not follow the plaintiffs' logic.

Actually such costs as the plaintiffs sued to deduct should not be eligible to claim when there was no paid training or apprenticeship. The BFH conceded with both! This judgment is relevant for training with costs along with one's studies at a university, e.g. as a pilot or non-medical practioner.

Since costs for accommodation, school fees, computer, literature easily amount to five digit sums, this verdict will be expensive for Germany. These costs are to be deducted to directly reduce the "profit" from employment and not as only partially deductible personal expenses. In other words, the first vocational training you get after your "Abitur" will be deductible. The only remaining detail to consider is how long you will be able to back-deduct such costs. The judges did not leave that question open.

The highest fiscal court contradicted the common practice of local tax offices with its judgments that the costs for the first vocational training are tax relevant expenses. These expenditures can be considered for five years retroactively for the first vocational training or studies at the university. They can be set off from later tax debts.

The BFH held that the previous argumentation cannot be derived from the Income Tax Act. In both cases, the claimed costs were to be considered to reduce the tax burden since they were "sufficiently concrete". Looking at the legal side of this issue, it is all about deducting income-related expenses or personal or special expenses. §12 no. 5 EStG does not establish a general deduction ban because it is correctly understood. The general idea is that when an expense can be considered as income-related or personal, then it is to deducted as professional (§10 I no. 7 EStG).

Consequences

If the costs for a vocational training or university studies are so concretely related to a later (self-) employment, then these expenses have to be considered as anticipated income-related expenses. This decision brings two positive results for students, apprentices and the like that are in vocational training:

1. These are not limited anymore to € 4,000 annually as personal deductions. 100% of these costs will reduce taxation.
2. These expenses do not fizzle out anymore when you momentarily have no income. They can be carried over as a tax loss that can be deducted from a tax burden (§10d EStG). Private deductions never create such a tax loss.

Of course, this judgment is also applicable for other subjects than the above mentioned. You have to meet the above mentioned requirements and especially a concrete relationship to your future position. If you want to obtain your tax loss but you have no income? When that is the case, then you have to submit a tax return.

How far back is a deduction possible?

You can go back as long as time limitations do not kicked in. This will generally be seven years. Two different scenarios are to be seen:

1. When you will be an employee, then you are not always required to produce a tax return. You will have four years time to go back. In other words, for your tax return 2011 (when receiving income) you can deduct expenses from 2007 - as the oldest.
2. Are you opening a business, you can go back for all the seven years. When preparing the tax return for 2011, the oldest deductibles can be from the year 2004.

Do not reckon that your local tax office will readily accept these deductions! It can easily happen that they might deny such deduction in the light of the State significantly loosing income. When this happens and you are declaring your taxes all alone, now is the time to get professional help!

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What can be deducted?

Typical examples of deductible costs are:

• fees for tuition, classes, exams, "studying (Studiengebühren)", "the term (Semestergebühren)",
• meetings,
• office supply, vocational literature,
• costs between your apartment and place of training
  • flat with 0.30 Eurocents per driven kilometer
    or
  • the real driving costs with your car
    or
  • tickets for public transportation
• extra costs for board & lodging by statutory flat rates.
• extra costs due to accommodation away from home.
• costs for a home office - when only with limitations.

Hint:

Your employer can cover - tax free - the costs for studies at a university parallel to your employment (berufsbegleitendes Studium). Better have a professional double check the agreement.