Can I claim my severance pay as a tax deduction?
April 15, 2024 | 40,00 EUR | answered by Fanni Siebert
Dear tax advisor,
My name is Christian Bacigalupo and I have been working in a company for 15 years, which is now planning a restructuring. As a result, I have been offered a severance package as my position will be eliminated in the future. I have heard that severance packages can be claimed for tax purposes, but I am unsure of how exactly this works and whether it is possible in my case.
Currently, I am employed and receive a fixed monthly salary. My concern is that the severance package I will receive may result in high tax payments, potentially eating up a significant portion of my financial savings. I am wondering if there are ways to reduce the tax burden on the severance package or if there are any tax exemptions that I can take advantage of.
I have gathered some information online, but unfortunately, the information there is often very general and not tailored to my individual situation. That's why I am reaching out to you for professional help and advice. Could you please explain to me how I can claim my severance package for tax purposes and what tax aspects I should consider? Are there ways to reduce the tax burden or specific exemptions that I can utilize?
I thank you in advance for your assistance and look forward to your response.
Sincerely,
Christian Bacigalupo
Dear Mr. Bacigalupo,
Thank you for your inquiry regarding the tax treatment of severance payments. I understand that you are concerned about how the severance payment will affect your taxes and whether there are ways to reduce the tax burden. I am happy to explain how you can claim your severance payment for tax purposes and what tax aspects you should consider.
In general, severance payments are subject to income tax, as they are considered income from employment. This means that the severance payment will be added to your taxable income and taxed accordingly. The amount of tax depends on your individual tax rate, which is determined by your total income.
There are several ways to reduce the tax burden on the severance payment. One option is to spread the severance payment over several years. If you can arrange with your employer to pay the severance over several years, you may fall into lower tax brackets and therefore pay less tax overall. However, this may not be possible in all cases, as it depends on the individual agreement with the employer.
Another way to reduce the tax burden is to use tax-free allowances and benefits. The so-called "Fünftelungsregelung" is especially worth mentioning in this context. This rule allows severance payments to be tax-favored by only being taxed at one-fifth. This significantly reduces the tax burden. However, it should be noted that the "Fünftelungsregelung" only applies to severance payments made in the context of termination of employment and must meet certain requirements.
It is important that you carefully consider all tax aspects related to your severance payment and seek professional advice if necessary. A tax advisor can help you develop the best tax strategy for your severance payment and take advantage of possible tax benefits.
I hope that this information has been helpful to you. If you have any further questions or would like a more detailed consultation, please feel free to contact me.
Sincerely,
Fanni Siebert, Tax Advisor
