What is a loss carryforward?
Loss carryforwards are especially advantageous for students, enabling them to offset a wide variety of the expenses they incurred during their studies in future years. Loss carryforwards can only be claimed if taxes where paid; however, most students don’t pay any taxes due to their annual income remaining below the tax-free amount of 9,408 euros (as of 2020), thus bypassing this rule.
Losses can be reported to the tax office in your tax return. Loss carryforwards ensure that the tax office (Finanzamt) takes note of the declared losses and once taxes are paid for the first time, these losses will be offset for tax purposes. For students, this means they can declare their expenses from their studies (losses) and be reimbursed for them in future years via a tax refund. Once they enter their career after their studies, they will already be off to a good start!
Can loss carryforwards be claimed by all students?
Students pursuing a second degree (master’s, doctorate, or bachelor’s degree with previous vocation training) can claim their education and professional expenses as income-related expenses (Werbungskosten) on their tax return. Students receiving their initial education can only claim their study costs as special expenses (Sonderausgaben), meaning a loss carryforward for students completing their first degree is unfortunately not possible. Students completing dual studies are the exception – they can deduct their education costs as income-related expenses.
- Loss carryforward necessary: If less income is recorded than expenses, this results in a tax loss. The tax office makes note of this loss as a sort of “tax bonus” that is redeemed as soon as one starts earning income.
- No loss carryforward necessary: Students recording more income than expenses, who pay taxes on their income, can report their tuition costs on their tax return and receive an immediate refund – in this case, a loss carryforward is not necessary.
Note: In 2015, the Federal Fiscal Court ruled that treating initial and secondary education differently for tax purposes is unconstitutional; because of this, most people assumed that the court would rule in the favor of those receiving their initial education claiming loss carryforwards. Contrary to these expectations, the courts final ruling in 2019 determined that initial education is still different from secondary education – a justification for this decision was given, but it is hardly understandable.
As a consequence, students pursuing their first degree can only claim their educational expenses as special expenses and cannot carry the losses forward to be offset in future years. These expenses can only have a tax-reducing effect in the actual year in which they occurred.
Loss carryforward advantages at a glance
You’re not required to have any income to claim a loss carryforward.
Claim in Full
You can carry forward your unlimited full expenses.
Claim over Time
Your losses can be carried forward for several years until you begin employment.
By claiming a loss carryforward, you receive a sort of tax bonus when starting your career.
When does my loss carryforward take effect?
Loss carryforwards are redeemed as soon as your income exceeds the loss amount – this is usually the case once you have completed your studies and have started working in a permanent career. At this point, your losses are refunded automatically by the tax office offsetting your losses against your income tax.
Example of a loss carryforward
Let’s say that you pursued your master’s degree between 2016 and 2018, didn’t receive any significant income during this time, and filed your tax return each year. By completing your tax return during your studies, the tax office took note if your losses and carried them forward, resulting in a total of 15,000 euros in study expenses over the course of three years.
After graduating, you started a job in 2019 that pays you 45,000 euros per year. This income is declared in your tax return, but due to your losses carried forward during your studies, your taxable income is significantly reduced. Instead of a taxable income of 45,000 euros, your tax is now calculated on an income of 30,000 euros (the 15,000 losses are offset). Since you’ve already paid your wage taxes throughout the year, you will receive a larger refund due to the excess taxes that you’ve paid via your monthly wage tax.
A “negative” example of a loss carryforward
Let’s assume a graduate ends their studies in October 2018 and already had the tax office recognize a loss carryforward of 7,000 euros in the 2017 tax year. They start working in November 2018 with a gross salary of 5,000 euros a month. Their total taxable income amounts to 10,000 euros for the year (5,000 in November and December) minus 1,000 euros from the income-related expenses lump sum – so 9,000 euros.
With a total income of 9,000 euros, their income tax would already amount to 0 euros (taking into account their special expenses, insurances, etc.) but the loss carry forward would still be deducted from this taxable amount leaving no particular tax impact. This means that the later in the year that you begin work, the less likely you will receive a refund for your loss carryforward. If you want to receive your highest possible refund from your loss carryforward, it’s recommended to start your career in the year of your graduation, September at the latest.