Tax Reduction for Tradespeople’s Services: Making the Most of the Tax Benefit
The tax deduction under Section 35a of the Income Tax Act (EStG) allows taxpayers to deduct 20% of the labor costs for skilled trade services directly from their income tax. This can save up to €1,200 in taxes per year. However, to qualify for this tax benefit, several important requirements must be met. In this article, you’ll learn how to make the most of the tax reduction and what pitfalls to avoid.
Who is eligible for the tax reduction?
Taxpayers who have renovation, maintenance, or modernization work performed on their owner-occupied house or apartment can claim the tax reduction under Section 35a of the Income Tax Act (EStG). This includes, among other things:
- Work on heating, plumbing, or electrical systems,
- painting and varnishing work,
- Landscaping and paving work.
However, the reduction applies exclusively to labor costs, not to material costs. You can deduct 20% of the labor costs from your income tax, up to a maximum of €1,200 per year. This corresponds to 20% of a maximum of €6,000 in labor costs.
What are the requirements for the tax deduction?
In order for the tax office to grant the tax deduction, you must meet the following requirements:
- Invoice: A valid invoice must be provided. It must clearly state the name of the tradesperson, the recipient of the service, the date and scope of the work performed, as well as the labor costs. No tax deduction is possible without an invoice.
- Payment by bank transfer: Payment for the tradesperson’s services must be made electronically, i.e., by bank transfer or direct debit. Cash payments are not accepted by the tax office.
Why advance payments can be problematic
A common mistake is making a hasty advance payment for tradesman services that are not scheduled to be performed until the following year. In July 2024, the Düsseldorf Tax Court ruled that advance payments for tradespeople’s services to be performed in the following year may not be taken into account for tax purposes in the year of payment if no corresponding invoice is available. This means: A voluntary advance payment made without an invoice being issued cannot result in a tax deduction in the year of payment. The risk is that you make payments that cannot be claimed for tax purposes in the desired year.
When is the tax reduction recognized?
In general, the principle set forth in Section 11(2) of the Income Tax Act (EStG) applies: The tax reduction is recognized in the year the payment is actually made. If the work was performed in 2023, the invoice was also issued in 2023, and the payment was made in that year, the labor costs can be claimed on the income tax return for 2023.
How can you maximize the tax benefit?
If you anticipate that the labor costs for tradespeople’s services will exceed the annual maximum of €1,200, there is a smart way to maximize the tax benefit: Agree on a partial payment with the tradesperson. This allows you to spread the expenses over several years and take full advantage of the maximum amount over multiple years. Such a payment deferral poses no tax issues and prevents you from losing the tax benefit due to a voluntary advance payment.
Conclusion: Proper planning for tax relief
To receive the 20% tax reduction for tradespeople’s services under Section 35a of the German Income Tax Act (EStG), precise planning is necessary. Ensure the invoice is issued correctly and never pay in cash. Avoid making voluntary advance payments without an invoice, as these cannot be claimed in the year of payment. Plan your tradespeople’s services so that you make optimal use of the maximum amount—for example, by deferring part of the payment to the following year.
By following these steps, you can secure the full tax benefit and deduct up to €1,200 per year from your taxes. Would you like to take advantage of additional tax benefits? With our offices in Düsseldorf and Oberhausen, we are available to assist you in person. Our team of qualified tax professionals is here to assist you with all your tax questions and concerns. Contact us to schedule a consultation.
