Are there tax exemptions for severance payments?
April 26, 2024 | 40,00 EUR | answered by Albrecht Schlüter
Dear Tax Advisor,
My name is Björn Raab and I have been working in a medium-sized company for over 10 years. Recently, I was informed unexpectedly that my position will be eliminated due to restructuring in the company and that a severance package will be offered to me.
Now I am concerned about the tax implications of this severance package. Are there any tax-free allowances that I can claim when declaring my severance package? I would like to know if there are ways to reduce or even avoid the tax burden on my severance package.
I am aware that severance packages are generally taxable, but I have heard that there could be certain tax-free allowances that I can claim. I also wonder how the severance package will be treated for tax purposes if I receive it in installments, or if there are ways to optimize the tax treatment of the severance package.
I hope you can help me with my questions and provide me with possible solutions to minimize the tax burden of my severance package. Thank you in advance for your assistance.
Sincerely,
Björn Raab
Dear Mr. Raab,
Thank you for your inquiry regarding the tax implications of your severance payment. It is understandable that you are concerned and would like to know what options are available to minimize the tax burden of your severance payment.
In general, severance payments are subject to taxation, but there are certain tax-free allowances that you can claim to reduce the tax liability. One option is the so-called "Fünftelungsregelung," which allows severance payments to be taxed at only one-fifth under certain conditions. This rule applies when the severance payment would be taxed together with the salary of the current year, resulting in a higher tax burden.
Furthermore, there is the so-called "Übergangszeitraum," which allows for the severance payment to be spread over several years to reduce the tax burden. The severance payment is evenly distributed over five years and taxed accordingly. Receiving the severance payment in the form of non-cash benefits such as training courses or vouchers can also reduce the tax burden.
If you receive the severance payment in installments, it will be taxed in the year in which the payment is made. However, it is also possible to arrange for a tax-optimized payment with your employer to minimize the tax burden.
It is advisable to consult a tax advisor in any case to analyze your individual situation and provide you with tailored solutions. A tax expert can help you maximize the tax-free allowances and optimize the taxation of the severance payment.
I hope this information is helpful to you and that you can better assess your tax situation. If you have any further questions, please feel free to contact me.
Best regards,
Albrecht Schlüter
Tax Advisor
