Can you deduct attorney and court fees from taxes?

In life, there are unforeseen situations where the assistance of qualified individuals who are well-versed in legal regulations is required – whether it be legal advisors, attorneys, or notaries. Legal fees and court costs can be very high and significantly strain our budget, so we often look for ways to save. In some cases, however, legal costs can be deducted from taxes as extraordinary expenses or income-related expenses. In this article, we will describe the conditions that must be met in order to claim them in the annual tax return – please read on.

Costs for legal advice – how much must be paid to the attorney?

In Germany, since 2004, a special law regulates the remuneration for the work of attorneys and prescribes minimum rates for certain activities and services. However, the attorney is not obligated to pay attorney fees based on the Attorney Costs Act – it is also possible to make what is known as an honorarium agreement. In most cases, however, this concerns matters where the rates exceed the statutory remuneration.

In the case of attorney fees, there are differences between out-of-court advisory costs, out-of-court representation, and court representation. The attorney is obligated to protect the clients from unnecessary costs and provide appropriate advice.

How to calculate costs for out-of-court representation by an attorney?

If we want the attorney to act on our behalf, for example by writing a letter to the other party in a dispute and handling all related formalities, we must account for the costs of out-of-court legal representation.

The basis for determining the attorney’s fees is the value of the subject of dispute – the amount at stake in the dispute. For example, if your vehicle was damaged in a car accident for which you were not responsible, and the repair costs would amount to €5,000, you would need to consider this value, namely €5,000, as the value of dispute.

There are special attorney fee calculators on law firm websites that can be used to calculate the exact amount. For this, you must specify the aforementioned value of the dispute, whether you want representation only in court or also outside, and whether a court hearing is likely. These factors allow us to preliminarily determine the expected legal costs.

Costs for legal representation in court – how high are the court fees?

If out-of-court settlements cannot be achieved, it is necessary for the court to make a decision to resolve the legal dispute. This is when the costs for legal representation arise. The amount of attorney’s fees and court fees is regulated by two laws – the Attorney Compensation Act and the Court Fees Act. In such cases, an advance payment for the litigation costs must be made to the court. The total cost of the proceedings depends on the specific circumstances of the case.

Who bears the legal costs?

If we completely win the case, the opposing party must bear all costs of the legal dispute – they assume our liabilities. In the case of a complete loss, however, we must bear all previous procedural costs ourselves. There are also judgments that determine a partial recognition of the legal position – in this case, we receive a refund of court fees from the opposing party for that part, while we must bear the remaining costs ourselves.

In which cases can court costs be deducted from taxes?

According to a ruling by the Federal Fiscal Court from June 2015, legal dispute costs do not constitute an extraordinary burden and cannot be deducted from taxes.

However, there are some exceptions – the case must be existentially important for the taxable person or concern a significant area of human life. These terms are very broadly defined and therefore leave much room for interpretation. Below, however, are the legal dispute costs that can be deducted from taxes.

Disputes between landlords and tenants

Legal disputes between landlords and tenants are common. In such cases, the landlord can deduct most of the legal costs – court fees or attorney fees. Such a dispute is considered income-related and treated as costs for acquiring income.

For tenants, the possibilities for deducting attorney fees are significantly limited – it must be proven that the judicial dispute threatened their existence. This can be the case if it can be proven that the lease was terminated without justification and unlawfully.

Conflicts with pension insurance

Retirement provision is intended to provide us with the financial means for a peaceful life in retirement. However, if we become unable to work due to illness or accident, disagreements with pension insurance can arise.

In such cases, it is often necessary to go to court to determine the amount of the disability pension or the timing of its payment. Fortunately, the costs associated with clarifying such a conflict can be deducted from taxes.

Labor disputes

If any disputes related to our employment have significant impacts on our life and existence (which is often the case, as it is our source of income), it is possible to deduct the associated costs from taxes if the case goes to court. All costs for attorneys or other legal and court services can be considered as costs for generating income.

Costs for legal proceedings – when can they be deducted from taxes?

However, there are some conditions that must be met for legal costs to be considered extraordinary burdens and deducted from taxes. Above all, they must exceed a certain threshold for the tax office to accept them. Also, these expenses must be unusually high compared to individuals with similar incomes under normal circumstances – if the court costs due to your case are significantly higher than usual for any reason, the tax office is more likely to accept the deduction. The inevitability of the proceedings and the likelihood of success are also considered.

When can court costs not be deducted from taxes?

Unfortunately, most attorney and court costs cannot be deducted in the annual tax return – for most cases not described above, the German tax office does not provide the possibility.

This applies, among other things, to common cases such as divorces or inheritance disputes – since 2013, all costs associated with divorce and inheritance must be borne by the parties themselves, and there are no exceptions. These matters between family members are considered private matters that can be avoided and settled out of court.

To reclaim court costs, a tax return must be filed with the tax office. We recommend using the Taxando app – a modern program for handling taxes in Germany. With it, you save both time and money – this is the best way to receive a favorable refund!