Treatment of a refund overhang for church tax

If the tax office refunds more church tax in a year than was paid, this refund overhang cannot be offset against a loss carryforward.

The fact that church tax is a special expense gives it a special status among tax types and has consequences if the tax office refunds more church tax in a year than is paid. This refund overhang is a negative special expense, i.e. it increases taxable income. The Federal Fiscal Court has ruled that the refund overhang is not subject to loss offsetting and consequently cannot be offset against a loss carryforward. This can result in income tax being incurred even though all income has been offset by loss carryforwards. The excess refund is taxed even if the refunded church tax did not have a tax-reducing effect in the year of payment.

The situation is different in the case of church tax on investment income, because a fictitious special expense deduction is already taken into account when church tax is levied in the case of the final withholding tax. Therefore, church tax on investment income is not deductible as a special expense. Conversely, however, a refund surplus is also not tax-increasing, as the Lower Saxony Tax Court has clarified.