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Kindergarten fees: Tax-free employer subsidies reduce the special expenses deduction

Many employers subsidise the accommodation and care of their employees’ children, who are not obliged to attend school, in kindergartens and similar facilities. In the sections below we discuss the extent to which this benefit is cut back because special expenses deductions have to be reduced.

In their tax returns, parents are able to deduct two thirds of their childcare costs, up to a maximum of € 4,000, per child and year as special expenses. It is irrelevant whether the child is cared for in a play group, goes to a kindergarten or an afternoon childcare centre. However, the childcare costs may only be deducted if the child is a member of the parental household and is not yet 14 years of age. Moreover, the parents have to obtain an invoice for the childcare costs (or a fee notification) and the payment of the childcare costs has to have been cashless.

Besides this tax relief, the German Income Tax Act provides for employers being able to subsidise or completely finance, free of tax, the accommodation and care of their employees’ children, who are not obliged to attend school, in kindergartens and similar facilities. This is on condition that these benefits are provided in addition to remuneration that would in any case be due. The Federal Fiscal Court (Bundesfinanzhof, BFH), in its decision of 14.4.2021 (case reference: III R 30/20) critically examined the extent to which employer subsidies may be deducted as special expenses. According to this, kindergarten costs that have been assumed by employers free of tax should not, in addition, be deductible as special costs. In the case in question, the married claimants had paid kindergarten fees of € 926 and had received a tax-free kindergarten subsidy from the employer in the amount of € 600. Contrary to the view of the claimants - according to which two-thirds of the full amount of € 926 should be deducted as a special expense - the local tax office reduced the full amount by the subsidy of € 600 and only allowed the remaining amount, namely € 326, to be used as the basis for deducting two-thirds as special expenses. 

The BFH accepted the calculation by the local tax office and declared that, when determining special expenses, it was only possible to include those expenses that had given rise to an actual and definite economic burden. In the case in question, the tax-free employer subsidy for a specific use resulted in a reduction in the economic burden of the parents by a corresponding amount. Consequently, the special expenses have to be reduced by the amount of the tax-free employer subsidy that, in the view of the judges, also applies in equal measure for married and unmarried parents.

Please note: In a tax return, only ‘pure’ childcare costs will be accepted as special expenses. Costs for a child’s meals, tuition and sports activities, for example, are not subject to any tax relief.

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