Do I have to pay taxes on my severance payment if I use it to pay off debts?
February 4, 2023 | 50,00 EUR | answered by Lorenzo Zimmermann
Dear Tax Advisor,
My name is Paula Eiserfelder and I am currently facing an important decision regarding my severance payment. I recently received a severance payment from my former employer and am considering using it to pay off my debts. However, I am worried about whether I still have to pay taxes on the severance in this case.
My current situation is as follows: Due to unforeseen financial difficulties, I have accumulated debts that I urgently want to reduce. The severance payment would greatly help me in this regard, as it could cover a large part of my debts. However, I also want to make sure that I do not have any additional tax burdens.
Therefore, my question to you is: Do I have to pay taxes on my severance payment if I use it to pay off debts? Are there any specific requirements or restrictions that I need to consider in order to avoid tax consequences? What are the alternatives to optimally utilize the severance payment for tax purposes while also paying off my debts?
I would greatly appreciate it if you could assist me in this matter. I look forward to your expert advice and thank you in advance for your support.
Sincerely,
Paula Eiserfelder
Dear Paula Eiserfelder,
First of all, I would like to thank you for trusting me with your consultation and I am happy to assist you in your decision regarding your severance payment.
If you have received a severance payment and would like to use it to pay off your debts, the question arises about the tax treatment of this severance payment. In general, severance payments are subject to taxation, but there are certain regulations that allow you to avoid tax consequences if you use the severance payment to pay off debts.
Severance payments are usually taxed as other income, which means they are subject to progression proviso. This means that the severance payment is not considered as salary, but is still taken into account when determining the tax rate for your other income. Using the severance payment to pay off debts can lead to a reduction in your taxable income and therefore your tax burden.
However, there are certain conditions that you should consider in order to avoid tax consequences. Firstly, the use of the severance payment for debt repayment should be verifiable. It is recommended to carefully keep all payment transactions and receipts to be able to prove, in case of an audit by the tax office, that the severance payment was actually used to pay off debts.
Furthermore, you should ensure that the debts you want to pay off with the severance payment have not already been tax-deductible. If, for example, you have already claimed loss carryforwards or special expenses, using the severance payment to pay off these debts could have tax consequences.
There are also alternatives to optimally use the severance payment for tax purposes while paying off your debts. For example, one option could be to invest the severance payment in a tax-optimized investment form to minimize the tax burden. However, careful consultation and planning are necessary to find the best solution for your individual situation.
Overall, it is possible to use the severance payment to pay off debts without incurring additional tax burdens. It is important to consider the conditions and consult a tax advisor if in doubt, to ensure that you are acting in a tax-compliant manner.
I hope that my explanations have been helpful to you and I am available for any further questions you may have. I wish you success in your decision and debt repayment.
Best regards,
Lorenzo Zimmermann
