Legal and court fees: What is tax-deductible?
Various expenses may be deducted on your tax return. However, personal expenses are generally not tax-deductible. Over the course of your life, you may find yourself involved in a legal dispute. Unless you have appropriate legal expense insurance, you can quickly face high costs for attorneys and court fees. At our offices in Düsseldorf and Oberhausen, we are often asked whether such costs are considered personal expenses or if they can be claimed on your tax return. Since there is no general answer to this question, we will address this topic in this article.
Background: Legal and Court Costs on Your Tax Return
It is important to recognize that costs for a lawyer or court are not expenses that can be attributed to a specific situation. The need for a lawyer can arise for a variety of reasons. There are legal and court costs that are certainly tax-deductible. To determine whether an expense can be deducted, the legal situation must be examined closely. For example, if the court case is related to your job, a tax-deductible connection is often established. However, if you want to sue your neighbor because they are too loud in the evenings, the tax office will not provide you with any tax relief regarding the costs.
Which legal disputes can be deducted from taxes?
There are various legal situations that always allow for expenses to be claimed on your tax return. Below, we will explain the most important disputes and show why a tax-related connection exists.
- Disputes between Landlords and Tenants
Unfortunately, it is not uncommon for landlords and tenants to become involved in a legal dispute. The landlord is in a favorable position from a tax perspective. Nearly all costs for attorneys, experts, or court proceedings can be claimed as tax deductions. A dispute with a tenant is ultimately linked to the rental income source and can therefore be claimed as business expenses.
For the tenant, it is possible to deduct costs in significantly fewer cases. As a tenant, you would have to prove that the legal proceedings threaten your livelihood. This condition might be met in the case of a groundless termination of the lease. Otherwise, the tenant must bear the full costs.
- Conflicts with the Pension Insurance
Pension insurance is intended to ensure that we have sufficient financial resources in old age. If an illness or accident leads to early disability, conflicts with the insurance provider are unfortunately inevitable. The amount of the disability pension or the timing of payments often must be settled in court. The good news: Costs incurred in disputes with the pension insurance can be deducted from taxes.
- Disputes in the Workplace
Unfortunately, conflicts also frequently arise in the workplace. Terminations, unpaid wages, or conflicts with colleagues sometimes end up in court. The rule is that expenses are tax-deductible if the situation becomes a matter of survival for the employee. Since this concerns the basis of income, this criterion is very often met. As soon as the legal proceedings are related to the employee’s work, it becomes even easier to justify a tax-related connection. For example, if disputes arise following a workplace accident, all expenses for attorneys, etc., are considered income-related expenses.
- Legal and court costs become an extraordinary financial burden
If you have already had to deal with a legal dispute, you know that court proceedings can quickly become expensive. In a major legal dispute, costs can rise to several thousand euros. Without appropriate legal expense insurance, this can quickly lead to a significant financial burden. Fortunately, these expenses may be deductible as extraordinary expenses.
Several factors are tied to the definition of an extraordinary burden. For the tax office to recognize the costs as such, a threshold must be exceeded. The expense must be one that would not normally be incurred by other people in a similar income situation under normal circumstances. You can see, then, that there is some leeway in interpretation here. In case of doubt, it is therefore advisable to consult a tax advisor. Furthermore, it is important that there be a reasonable chance of winning the case. Additionally, a certain inevitability of the proceedings is required. The last two points should be taken into account to ensure that an extraordinary burden is actually recognized. Unfortunately, there is some disagreement in case law regarding this. Therefore, communication with the relevant tax office and a good tax advisor is essential.
When are costs for disputes not recognized by the tax office?
Unfortunately, the portion of legal and court costs that cannot be deducted is significantly larger. In many cases, you have no option to claim these expenses. Below, we will outline two classic cases. If you have incurred costs for a lawyer or legal proceedings and are unsure whether these may be claimed on your tax return, consult a qualified tax advisor. The following cases can never be claimed as tax deductions:
- Divorces
The costs of a divorce can be particularly high in contentious cases. Unfortunately, since 2013, all expenses related to a divorce must be borne by the individual. There are no exceptions or special cases here.
- Inheritance disputes
The tax office also does not consider inheritance disputes to be tax-relevant. Disputes among family members are viewed by the tax authorities as a private matter that is deemed avoidable. In very rare cases, a person’s livelihood could be at risk without the legal proceedings. Only then may the expenses be claimed as income-related expenses. However, based on our experience, we can say that such special cases are rarely recognized by the tax office. Costs related to inheritance disputes may, however, be taken into account in the context of the inheritance tax return.
Tax Consulting in Düsseldorf and Oberhausen
It is clear that legal and court costs are not an easy topic to navigate in a tax return. We hope that you were nevertheless able to gain some insight from this article. If you find yourself in one of the situations mentioned, we would be happy to advise you and assist you with the next steps. Simply schedule a consultation. Contact us now.
