The deduction of income-related expenses in their actual amount for investment income is possible upon application in cases where the individual income tax rate, even after applying the saver's lump-sum allowance, is already below the flat-rate withholding tax (Abgeltungsteuer) rate of 25%. The Finanzgericht Baden-Württemberg ruled in favour of an elderly lady (judgment of 17 December 2012, Az. 9 K 1637/10): In principle, the deduction of income-related expenses is excluded under the flat-rate withholding tax regime (saver's lump-sum allowance of EUR 801). However, according to the Finanzgericht, this absolute prohibition of deduction is unconstitutional in cases where the individual tax rate is already below the flat rate of 25% when only the saver's lump-sum allowance is taken into account and the actual income-related expenses incurred are higher. In the case decided, the lady was no longer able to manage her assets for health reasons and had therefore engaged a trustee to manage them, incurring costs that exceeded the saver's lump-sum allowance. The tax office refused to recognise these income-related expenses. In such cases, it is advisable to file an objection referring to this judgment. An appeal to the BFH has been admitted, as the case is of fundamental importance (Az. VIII R 13/13).
Frequently asked questions
Frequently asked questions
Can actual income-related expenses exceeding the saver's lump-sum allowance be deducted from capital income?
As a rule, the deduction of actual income-related expenses on capital investment income is excluded, since the saver's lump-sum allowance of EUR 801 covers all such expenses. However, according to a ruling of the FG Baden-Württemberg (9 K 1637/10), deducting actual costs may be possible in exceptional cases where the individual tax rate—after applying the lump-sum allowance—is already below the flat withholding tax rate of 25%.
When is the prohibition on deducting income-related expenses under the flat-rate withholding tax considered unconstitutional by the Tax Court?
The Tax Court of Baden-Württemberg considers the absolute deduction prohibition unconstitutional if the taxpayer's personal income tax rate is already below 25% when only the saver's lump-sum allowance is applied, and actual income-related expenses are higher. In such cases, the prohibition results in an unreasonable disadvantage compared to the flat-rate withholding tax rate.
Which income-related expenses were in dispute in the case before the FG Baden-Württemberg?
An elderly lady was no longer able to manage her assets herself for health reasons and engaged a trustee. The resulting management costs significantly exceeded the saver's lump-sum allowance. The tax office denied the deduction, whereas the FG recognised the costs as deductible.
How should taxpayers proceed when the deduction of income-related expenses on capital income is denied?
Affected taxpayers should file an objection (Einspruch) against the tax assessment and rely on the ruling of the Tax Court of Baden-Württemberg (9 K 1637/10) as well as the pending appeal before the BFH (VIII R 13/13). This keeps the assessment procedurally open until the final decision of the highest court.
Has an appeal been filed against the ruling of the FG Baden-Württemberg on the deduction of income-related expenses?
Yes, the appeal was allowed due to the fundamental significance of the legal issue. The case is pending before the BFH under file number VIII R 13/13, so a final ruling by the highest court is still outstanding.