(2023)
Divorce costs no longer tax deductible from 2013
"Till death do us part?" Not quite. Around one in three marriages in Germany ends prematurely. Each time, this involves significant costs for both parties. Each spouse faces the question of whether they can deduct their divorce costs as extraordinary burdens to reduce their tax. A distinction must be made between the costs of the divorce proceedings and the consequential matters.
- Until 2012, legal and court costs of a divorce could be deducted as extraordinary burdens - at least those for the actual divorce and pension rights adjustment.
- However, from 2013, the tax authorities no longer recognise divorce costs as tax-deductible - neither for the consequential matters nor for the actual divorce and pension rights adjustment. Allegedly due to a change in the law. The law now states that legal costs are generally excluded from deduction and are only exceptionally recognised for tax purposes "if the taxpayer would risk losing their livelihood and being unable to meet their basic needs in the usual manner" (§ 33 para. 2 sentence 4 EStG).
- Since 2013, the official instructions for the income tax return state: "Legal costs are no longer deductible as extraordinary burdens from 2013... The prohibition also applies to the costs of divorce / annulment of a civil partnership."
- Several tax courts have recognised divorce costs as extraordinary burdens even after the new regulation of § 33 para. 2 sentence 4 EStG from 2013. The legislator only wanted to restrict the taxpayer-friendly BFH ruling from 2011 and restore the old legal situation. This is evident from a statement by the Bundesrat in the legislative process, which aimed to limit the recognition of legal costs to the "previous narrow framework". This always included the direct costs of a divorce process (FG Rheinland-Pfalz of 16.10.2014, 4 K 1976/14; FG Münster of 21.11.2014, 4 K 1829/14 E; FG Münster of 19.6.2015, 1 V 795/15 E; FG Köln of 13.1.2016, 14 K 1861/15).
The Federal Fiscal Court has now clarified the legal uncertainty and agonising doubt as to whether divorce costs are tax-deductible from 2013 - unfortunately to the detriment of taxpayers:
From 2013, divorce costs are indeed no longer deductible as extraordinary burdens according to § 33 EStG. "Because a taxpayer does not regularly incur the expenses for divorce proceedings to secure their livelihood and basic needs" (BFH ruling of 18.5.2017, VI R 9/16).
- Since the amendment of § 33 EStG in 2013, expenses for legal proceedings (legal costs) are generally excluded from deduction as extraordinary burdens. According to § 33 para. 2 sentence 4 EStG, the prohibition on deduction does not apply if the taxpayer would risk losing their livelihood and being unable to meet their basic needs in the usual manner without the expenses.
- According to the BFH, the costs of divorce proceedings are regularly not incurred to secure the livelihood and basic needs. This can only be assumed if the taxpayer's economic livelihood is threatened. Such existential concern does not apply to divorce costs, even if remaining in the marriage would severely impair the taxpayer's life.
- Although the BFH considered divorce costs as extraordinary burdens until the amendment of § 33 EStG in 2013, this is no longer possible under the new regulation. The legislator intended to reduce the tax relevance of legal costs to a narrow framework and deliberately exclude divorce costs from deduction as extraordinary burdens.
Following this decision, legal costs related to a divorce are no longer tax-deductible: neither for consequential matters, e.g. post-marital maintenance, child matters, gain adjustment and asset settlement (as before), nor since 2013 for the actual divorce and pension rights adjustment.
BUT: The Münster Finance Court recently ruled that legal costs to obtain post-marital maintenance are deductible as income-related expenses if the maintenance recipient taxes the maintenance payments as other income according to § 22 no. 1a EStG (FG Münster of 3.12.2019, 1 K 494/18 E).
The case: The claimant and her now-divorced husband separated in 2012. They conducted family court proceedings covering the divorce, pension rights adjustment, and post-marital maintenance. In 2014, the marriage was dissolved by court order, and the claimant's former husband was ordered to make monthly maintenance payments. The woman sued for higher monthly payments against the court order. In 2015, a court settlement was reached on the maintenance amount. In her 2015 income tax return, the claimant declared other income in the amount of the maintenance payments received and claimed the legal costs (court and legal fees) for tax reduction. The tax office refused to consider them.
The judges believe that the maintenance recipient's legal costs should be considered as income-related expenses because she taxed the maintenance payments from her ex-husband under § 22 no. 1a EStG. The woman incurred the legal costs to receive (higher) income in the form of maintenance payments in the future. The maintenance payments are to be treated as taxable income under § 22 no. 1a EStG because the ex-husband, as the payer, had the option to deduct his maintenance payments as special expenses under § 10 para. 1a EStG, known as real splitting. The maintenance payments are thus fully equated with other income. Consequently, a full deduction of income-related expenses must also be possible.
