Loss Carryforward is how you as a student will get your expenses back! Find out how it affects you
Loss Carryforward: All students who are completing a second training (master’s, doctorate or bachelor’s degree with previous professional training) can claim their training and work-related expenses as income- related expenses for tax purposes. Find out below why Loss Carryforward is important.
- What is a loss carryforward?
- Can all students claim a loss carryforward?
- Advantages of the loss carryforward at a glance
- When can I redeem the loss carryforward?
- Example: This is what a loss carryforward can look like
- Loss carryforward and when to start working! A special case in which the loss carryforward is used up without reimbursement
What is a loss carryforward?
In German commercial and tax law, loss carryforward is the sum of the cumulative losses of previous years that have not yet been offset against profits. A loss occurs when expenses exceed income. With a loss carryforward, losses are offset against profits that are expected in the future. This reduces the tax burden.
Studying is associated with high costs. Fortunately, students can deduct many of their tuition costs for tax purposes. However, the state will only return money for training if taxes are also paid. Most students do not yet pay taxes because their annual income is below the basic tax allowance of 9,168 euros in 2019 or 9,408 euros in 2020. That is why German tax law offers an advantageous solution for students: the loss carryforward.
With a loss carryforward, study costs (= losses) can be reported to the tax office in a tax return. The tax office notes the specified expenses and as soon as taxes are paid for the first time, the losses carried forward are offset against tax. For a student, this means that if he starts his career as an employee, for example, he can be reimbursed for study costs in the form of a tax refund. For graduates who become self-employed, the amount of the tax to be paid is reduced accordingly.
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Can all students claim a loss carryforward?
All students who are completing a second training (master’s, doctorate or bachelor’s degree with previous professional training) can claim their training and work-related expenses as income-related expenses for tax purposes. For students in their initial training, the tax office currently only recognizes the study costs as special expenses; a loss carryforward is therefore not possible (see notes below). An exception applies to dual studies – these students can also deduct their training costs as income-related expenses.
- Loss Carryforward: When students have less income than expenses, they incur a tax loss. This loss is automatically recorded by the tax office as a kind of tax bonus that is redeemed as soon as income is generated.
- No loss carryforward: If students have more income than expenses and pay taxes on their income, the study costs specified in the tax return can be offset in full for tax immediately and a loss carryforward is not necessary. There will be an immediate tax refund.
Note: The Federal Fiscal Court decided in 2015 that the unequal tax treatment of initial and second training is unconstitutional. Most observers assumed that the Federal Constitutional Court, as the final instance, would rule that people in initial training can carry forward losses. Contrary to general expectations, the Federal Constitutional Court issued its judgment at the end of 2019 and decided that the initial training is different from the second training. A reason was given for this that is hardly comprehensible.
Unfortunately, the consequence is that the tax offices no longer offset the costs of the initial training as a loss carryforward with the tax claims of the following years. Instead, they can only be claimed as special expenses. The result is that the costs can only have a tax-reducing effect in the actual tax year, when they are incurred.
Advantages of the loss carryforward at a glance
- In order to make a loss carryforward for the study costs, no income is required.
- The full amount of the study costs can be carried forward as an unlimited amount.
- Loss carryforwards are possible over several years until taxes are paid.
- The loss carryforward gives you a kind of tax credit for starting your career.
When can I redeem the loss carryforward?
As a rule, students have less income than expenses during their studies and thus record a loss. Students in a second education can report this loss to the tax office by filing a tax return. The tax office takes note of this loss. As long as there is no excess income, the declared losses are automatically carried over to the next few years by the tax office.
The loss carryforward does not end until the income exceeds the losses according to the tax return. This is usually the case when you have finished your studies and started a permanent job. The losses carried forward (over the academic years) will now be reimbursed. This is done automatically by the tax office offsetting the income tax against the recorded losses from previous years.
Example: This is what a loss carryforward can look like
You completed a master’s degree from 2018 to 2020 and did not earn any significant income during this time and submitted a tax return for each year. You have carried your study costs forward as losses. The tax office has noted the annual losses and comes to the conclusion that you have accumulated a total of 15,000 euros in study costs over the three years.
In 2021 you started a job that earns you 45,000 euros a year. You state this income in your tax return and you have to pay taxes on it. However, due to your loss carryforwards during your studies, your taxable income is now significantly reduced. All you have to do is pay as much tax as if you only earned 30,000 euros. Since the wage tax is usually withheld directly from employees, you will now be reimbursed by the tax office for the taxes you paid too much. In this way you have recovered your study costs from the state.
Loss carryforward and when to start working! A special case in which the loss carryforward is used up without reimbursement
Let’s assume that a degree ends in October 2021 and a loss carryforward for the tax year 2020 has already been recognized in the amount of 7,000 euros. Assume that the graduate has a job from November 2021 and his gross wage is 5,000 euros per month. Advertising costs from the 2020 degree program amount to 1,000 euros. The result is then: At 5,000 euros gross monthly for November and December, the income from non-self-employed work for 2021 is 10,000 euros. After deducting the employee lump sum or verifiable advertising costs of, for example, 1,000 euros, 9,000 euros remain in income.
At 9,000 euros total income, the income tax would already amount to 0.00 euros, taking into account the special expenses for pension expenses as well as health and pension insurance. In this case, however, the income-related expenses for the course of 1,000 euros would be deducted (the flat-rate income allowance of 1,000 euros may remain). The loss carryforward would then be deducted from the sum of the income of 8,000 euros. The calculation would be: 8,000 euros minus 7,000 euros = 1,000 euros, which would correspond to a total amount of income of 1,000 euros. The result would be that the tax would remain zero, so the loss carryforward was used up completely without any tax impact.
In summary, you can be said that the risk of using up a loss carryforward without receiving a refund is higher if you start work later in the year. This means that from the point of view of tax reimbursement in the event of a loss carryforward, it makes sense to start work in September at the latest in the year of graduation.