“Income-related expenses (Werbungskosten)” vs. “special expenses (Sonderausgaben)” – Which costs can students deduct from their taxes?
In Germany, costs that result from the effort to secure or maintain income can be deducted from taxes as income-related expenses (Werbungskosten). This includes costs incurred during studies and training, e.g. for working materials, textbooks, laptops or tuition fees. However, this regulation only applies to second or Master’s degree courses and to studies or vocational trainings which are combined with an employment relationship.
Current German legislation (questionably) considers the first or Bachelor’s degree, as well as vocational trainings without employment, as a “private matter” and not as a professional qualification. Consequently, costs related to those degrees are considered “special expenses” (Sonderausgaben) instead of income-related expenses. This leads to a disadvantage because unlike income-related expenses, tax deductions for special expenses are capped at €6,000 per year – an amount that is quickly exceeded with tuition fees (or, in the case of high incomes, with the repayment of an Income Share Agreement).
Moreover, special expenses are only tax-deductible if taxes are paid the same year in which the costs are incurred. Students would therefore have to study and earn taxable income at the same time in order to be able to deduct the study costs as special expenses. Usually, this is only possible if students study part-time or use an ISA to finance their studies. Thus, being considered a private matter, first degree studies and vocational trainings without employment can only be claimed for tax purposes to a very limited extent, whereas second degree programs and trainings in combination with employment are considered to be professionally qualifying and enjoy tax advantages.
How did the Federal Constitutional Court rule about the unequal tax treatment of first and second degree courses?
After several complaints by former students and pilots, the German Federal Court of Auditors found the unequal tax treatment of first and second degree programmes in 2014 to be a violation of the general principle of equality and forwarded it to the Federal Constitutional Court in Karlsruhe for evaluation. On 10 January 2020, the Federal Constitutional Court confirmed in its ruling that the current tax practice is in conformity with the constitution. The court estimated that the first degree course is a private matter, since it not only imparts professional knowledge, but primarily serves personal development. According to the court, the first degree course serves to “develop talents and abilities accordingly and to acquire general competences which are not necessarily relevant for a future occupation”.
What are the implications for our students?
Since the ruling confirms current law, nothing will change for the students supported by CHANCEN eG for the time being. Still, the ISA offers considerable financial advantages to the supported students: students who are in their first degree (or training without an employment relationship) can claim the ISA repayment as special expenses (limited to €6,000 per year) for tax purposes in their repayment phase. Those who are in their second degree (i.e. who have already completed prior studies or vocational training) can deduct their repayment as income-related expenses and therefore profit from unlimited tax deductions. Further information on this can be found in our leaflet on tax deductibility of the ISA.
What does CHANCEN eG think of this regulation?
By financing their studies through an ISA from CHANCEN eG, the supported students only pay their study costs after they have completed their studies, as soon as they earn taxable income above a minimum income threshold. Through the subsequent repayment, first-time students in particular benefit from the possibility of a tax deduction, unlike most other first-time students. Nevertheless, CHANCEN eG is critical of the unequal treatment of first and second degree courses and different forms of training under the current tax law. The differentiation between private matter on the one hand and professional qualification on the other is not plausible. Studies and training are, without question, a very formative time; and it is a great concern of CHANCEN eG to enable free personal development through our financial support.
However, just as Master’s or second degree courses and vocational trainings make a major contribution to personal development, so too do first degree courses and training without employment already provide professional qualifications. For many professions, the Bachelor’s degree is a sufficient qualification and many students start their professional life after completing their first degree or training. In addition, study courses such as medicine, law and teaching professions are not divided into first and second degree courses but actually prepare students for very specific professions. We consider the reciprocal combination of the acquisition of professional qualifications and personal self-development as a unique advantage of studies and training courses, and therefore suggest a legal revision of the unequal tax treatment of first and second degree courses and trainings.