Are there ways to minimize the tax burden on my severance payment?
June 27, 2022 | 40,00 EUR | answered by Edith Hartmann
Dear tax advisor,
My name is Marie Zimmermann and I have been working for 15 years in a company that has unfortunately decided to dismiss me as part of restructuring measures. As a result, I have been offered a severance package which I would like to accept. However, I am very concerned about the tax implications of this severance.
My monthly income was previously 3,500 euros gross and the severance amount is a total of 50,000 euros. I am married and have two children, for whom I also need to provide financially. Since the severance is a significant amount, I am afraid that after deducting taxes, I will not have enough left to support my family.
Therefore, I would like to know if there are ways to minimize the tax burden of my severance. Are there any tax allowances that I can take advantage of? Or are there specific tax regulations or planning options to reduce the tax burden?
I would greatly appreciate your expert advice and support in finding a solution that allows me to make the best use of the severance without being financially burdened by high taxes. Thank you in advance for your help.
Sincerely,
Marie Zimmermann
Dear Mrs. Zimmermann,
Thank you for your inquiry regarding the tax implications of your severance payment. It is understandable that you are concerned about your financial situation after the dismissal, especially with your family obligations. I would like to provide you with some information and tips to minimize the tax burden of your severance payment.
First and foremost, I must point out that severance payments are generally subject to taxation. Therefore, they are taxed as income in full. However, there are certain exemptions and regulations that can help you reduce the tax burden.
An important point is the so-called "Fifth Rule" according to § 34 of the Income Tax Act (EStG). This rule allows you to treat the severance payment as tax-reducing by spreading it over five years. As a result, the tax burden is usually lower, as the severance payment is not taxed in a year with a higher tax rate. However, please note that this only applies to extraordinary income.
Furthermore, you can take advantage of certain tax exemptions and lump sums. These include, for example, the basic income allowance, child allowances for your children, as well as lump sums for work-related expenses. It is best to consult with your tax advisor to learn about all possible exemptions that you can claim to reduce your tax burden.
Additionally, you have the option to utilize tax planning strategies to minimize your tax burden. This includes creating provisions or transferring the severance payment into a tax-optimized pension plan.
I strongly recommend that you contact an experienced tax advisor to discuss your individual situation and find an optimal solution together. A professional tax advisor can help you maximize all tax possibilities and make the most of your severance payment.
I hope that this information is helpful to you and wish you success in the tax planning of your severance payment.
Kind regards,
Edith Hartmann
