Can I receive a severance payment tax-free?
September 30, 2023 | 50,00 EUR | answered by Edith Hartmann
Dear tax advisor,
my name is Yvonne Koch and I have been working in a medium-sized company for 10 years. Recently, my employer informed me that due to restructuring in the company, my position will be eliminated. He has offered me a severance package to mutually terminate the employment relationship.
However, I am concerned that this severance package could be subject to taxation and could eat up a large portion of my money. I have heard that under certain circumstances, it is possible to receive a tax-free severance package.
Could you please explain to me if and under what conditions I can receive a tax-free severance package? Are there specific tax exemptions or ways to minimize the tax burden? I would like to know what options I have to best keep my money.
Thank you in advance for your help.
Best regards,
Yvonne Koch
Dear Mrs. Koch,
Thank you for your question regarding the taxation of severance payments. I understand that it is important in such a situation to achieve the best possible outcome for oneself. In terms of the taxation of severance payments, there are indeed certain regulations that allow for receiving a severance payment tax-free or at least minimizing the tax burden.
In general, severance payments are subject to taxation according to § 3 No. 9 of the Income Tax Act (EStG). However, there are also exceptions that allow for receiving a severance payment tax-free. One possibility to receive a severance payment tax-free is, for example, the so-called "Fifth Rule" according to § 34 of the EStG. This rule states that severance payments made in the context of the termination of an employment relationship are only taxed at one-fifth of the regular tax rate under certain conditions. This can significantly reduce the tax burden.
Another possibility to receive a severance payment tax-free is the use of the so-called "excess model". In this case, the severance payment is spread over a period of up to five years, thus distributing the tax burden over several years. This can help avoid progression and minimize the tax burden.
There are also certain tax-free allowances that can be taken into account when it comes to severance payments. For example, the first 2,000 euros of a severance payment are tax-free if it is compensation for lost income. Additionally, expenses such as legal fees or moving costs can be deducted from the severance payment, reducing the taxable amount.
It is important to note that the tax treatment of severance payments is very complex and depends on various factors, such as the amount of the severance payment, the length of service, and the nature of the employment relationship. Therefore, I strongly recommend seeking individual advice from a tax advisor to find the best tax arrangement for you.
I hope that this information has been helpful to you. If you have any further questions, please do not hesitate to contact me.
Best regards,
Edith Hartmann
