Can a severance payment be paid out in a tax-optimized manner?
December 30, 2022 | 40,00 EUR | answered by Albrecht Schlüter
Dear tax advisor,
My name is Valentina Baumgart and I am facing the decision of whether I can receive a severance payment in a tax-optimized manner. My employer has offered to compensate me with a severance payment as part of a termination for operational reasons. I have heard that severance payments are generally subject to taxation and would like to know if there are ways to receive the severance payment in a tax-optimized way.
My current employment contract has a long company tenure and a correspondingly high salary. I am concerned that the severance payment could be significantly lower than expected due to the tax burden. Therefore, I am wondering if there are strategies to minimize the tax burden and receive the severance payment in a tax-optimized way.
I would like to know if, for example, there are options to receive the severance payment in installments or if there are tax benefits that I can take advantage of. Are there specific tax regulations or special provisions that apply to severance payments and could reduce the tax burden?
I would be very grateful if you could provide me with specific information on this topic and show me possible solutions on how I can receive the severance payment in a tax-optimized way. Thank you in advance for your assistance.
Kind regards,
Valentina Baumgart
Dear Mrs. Baumgart,
Thank you for your inquiry regarding the tax-optimized payout of a severance payment. It is understandable that you are thinking about how to minimize the tax burden and receive the severance payment as efficiently as possible. I would be happy to give you an overview of some possibilities for tax-optimized action.
Basically, it is correct that severance payments are subject to taxation. They are subject to income tax and depending on the amount of the severance payment, can lead to a significant tax burden. However, there are some strategies to reduce the tax burden.
One possibility is indeed to have the severance payment paid out in installments. By staggered payments over several years, you may potentially fall into lower tax brackets and therefore pay less taxes overall. This can be particularly advantageous if you have no or only a low income temporarily after the payment of the severance.
Furthermore, there are tax advantages that you can take advantage of. For example, the so-called "Fünftelregelung" can be applied if the severance is considered extraordinary income. With this rule, the severance payment is evenly distributed over 5 years and only one-fifth of the amount is taxed, leading to a significant tax saving.
Additionally, there is also the option to invest the severance payment in a tax-optimized manner. By investing in tax-optimized investment products such as Riester pensions or company pension schemes, you can reduce the tax burden and at the same time provide for the future.
However, it is important to note that tax regulations and options can vary individually and depend on different factors. Therefore, I strongly recommend that you seek advice from an experienced tax advisor to find a tailored solution for your personal situation.
I hope that this information is helpful to you and supports you on your way to a tax-optimized payout of your severance payment. If you have any further questions or need individual advice, I am at your disposal.
Yours sincerely,
Albrecht Schlüter
Tax advisor
