When are training costs deductible as special expenses and when as income-related expenses?

In principle, a distinction is made between training costs and further training costs. This distinction is crucial for determining whether the costs can be deducted only to a limited extent as special expenses or fully as income-related expenses.

1. Training costs – special expenses

Costs for a first vocational training or first degree are considered training costs for tax purposes. These can only be deducted as special expenses – however, up to a maximum of 6.000 Euro per year.

Important: Special expenses can only be taken into account in the year of payment. If there is no taxable income in that year, the deduction for special expenses does not provide any tax benefit.

2. Further training costs – income-related expenses

All costs incurred in connection with professional further training after the completion of the first training or first degree are considered further training costs. These can be fully deducted as income-related expenses if they are related to your job and serve to generate income.

This includes, for example:

• Retraining for a different profession,
• Further training in the current profession,
• Further training in a previously practised profession,
• A second degree.

3. First or second degree?

The tax treatment depends on whether it is a first or second degree:

• A first degree after leaving school is classified as initial training. The costs for this can only be claimed as special expenses up to 6.000 Euro per year – without loss carryforward.
• A second degree (e.g. a Master's degree after a Bachelor's degree or a part-time degree after training) is considered further training. The costs for this can be fully deducted as income-related expenses. A tax loss can even be carried forward to future years as a loss carryforward.

4. Loss carryforward for income-related expenses

Those who do not yet have an income but can claim training costs as income-related expenses (e.g. in a second degree) can claim these costs as anticipated income-related expenses. This creates a loss that can be carried forward to the first year with income and offset against it for tax purposes.

5. Example for clarification

Mr A and Ms B are both students without income.

• Ms B is studying for a first degree. She has 4.500 Euro in training costs. She can only deduct these as special expenses in the current year. However, since she has no income, this provides her with no tax benefit.
• Mr A is doing a second degree. He can claim the 4.500 Euro as income-related expenses and thus generate a tax loss. In the following year, when he has income, this loss will be offset against his income.

Result: Mr A pays less tax in his first year of employment than Ms B, even though both earn the same amount.

When are training costs deductible as special expenses and when as income-related expenses?

Study costs: When are they tax deductible?

Expenses for a first degree after school or for initial vocational training outside of an employment-based training programme are only deductible as special expenses up to 6,000 Euro (§ 10 para. 1 no. 7 and § 9 para. 6 EStG). This limitation is constitutional. In other cases, study costs can be deducted without limit as business expenses or, for the self-employed, as operating expenses, for example in the case of a second degree or job-related training after initial training.

In the following cases, study costs are deductible as business expenses without limit:

• First degree after completed vocational training: For example, a degree after an apprenticeship (BFH ruling of 18.6.2009, BStBl. 2010 II p. 816).
• First degree as part of an employment-based training programme: For example, for officers, career soldiers or in dual study programmes.
• Second degree: After completing a first degree, if the degree is job-related.
• Master's degree: As it requires a completed Bachelor's or other degree, it is considered a second degree.
• Doctorate: The costs of a doctorate are deductible as business expenses if they are job-related.
• MBA: An MBA is also a second degree and the costs are fully deductible.
• Parallel degree courses: If a second degree course is continued after completing the first, the costs of the second degree are considered business expenses.
• Referendariat: For lawyers and trainee teachers, expenses after the first state examination are fully deductible.

Study costs: When are they tax deductible?

Training costs deductible as business expenses after all?

According to the Federal Fiscal Court, training costs should be deductible as business expenses without limit. Training costs are incurred as a necessary prerequisite for subsequent employment and are therefore business expenses, as they serve to generate taxable income.

Thus, the BFH judges asked the Federal Constitutional Court to clarify whether it is compatible with the Basic Law that, according to § 9 para. 6 EStG, expenses for initial vocational training or for a first degree are not recognised as business expenses (BFH decision of 17.7.2014, VI R 8/12 and VI R 2/12).

Currently, however, the Federal Constitutional Court has finally clarified the highly controversial issue - after more than 5 years(!) - unfortunately to the great disappointment of all those affected and to the delight of the tax authorities: 

The current legal regulation is constitutional. The fact that expenses for initial vocational training or for a first degree cannot be deducted as business expenses does not violate the Basic Law. The constitutional judges thus contradict the highest financial judges! (BVerfG decision of 19.11.2019, 2 BvL 22/14, 2 BvL 23/14, 2 BvL 24/14, 2 BvL 25/14, 2 BvL 26/14, 2 BvL 27/14, published on 10.1.2020).

Training costs deductible as business expenses after all?

Au pair stay: Language lessons count as vocational training

Many school leavers are drawn abroad for a period after their A-levels. As an au pair, they aim to improve their language skills through language classes and get to know the country and its people. In return for free board and lodging, the host family expects help with childcare and household duties. During the stay abroad, parents are only entitled to child benefit or tax allowances if the au pair stay is considered vocational training.

How can an au pair stay be recognised as vocational training? It is necessary for the child to participate in theoretical and systematic language classes that amount to at least 10 hours per week.

Does it have to be exactly 10 hours per week, or might 8.6 hours per week be sufficient?

In addition to pure language classes, the au pair must also spend time on preparation and follow-up work.

Currently, the Federal Fiscal Court has ruled that language classes of only 8.6 hours per week are not sufficient. Therefore, the au pair stay abroad cannot be recognised as vocational training. In this case, neither child benefit nor child allowances were granted. "If the average is less than 10 hours per week, exceptionally individual months may still be considered as vocational training if they are characterised by intensive classes of significantly more than 10 hours, e.g. due to block classes or courses" (BFH decision of 14.6.2016, III B 132/15).

Exceptionally, language classes of less than 10 hours per week may be sufficient for recognition as vocational training. This is the case if the foreign language classes are a mandatory requirement in a training or examination regulation or if the language classes prepare for a recognised foreign language test. The two most important English language tests are TOEFL (Test of English as a Foreign Language) or IELTS (International English Language Testing System). (BFH ruling of 15.3.2012, III R 58/08; BFH ruling of 26.10.2012, VI R 102/10).

TOEFL language tests count as vocational training

Currently, the Saarland Fiscal Court has confirmed that an au pair stay after passing the TOEFL language test can be considered vocational training. However, one condition was particularly emphasised: Even if the acquisition of language skills is verified by a language test - such as TOEFL or IELTS - there must still be a concrete connection to vocational training. It is important that studies or other training are commenced or continued immediately (FG Saarland of 2.2.2014, 2 K 1308/13, final).

Au pair stay: Language lessons count as vocational training

First degree: What are the chances of a full deduction for income-related expenses?

Expenses for the first vocational training and for the first degree as initial training, which are not completed as part of a training employment relationship (e.g. apprenticeship), are currently only deductible as special expenses up to a limit of 6,000 Euro, while the costs for any educational measures after completing vocational training, including a first degree after an apprenticeship, can be fully considered as business expenses (§ 4 para. 9, § 9 para. 6, § 10 para. 1 no. 7 and § 12 no. 5 EStG).