Ask a tax advisor on the topic of Severance pay

Exemption/Optimization of the tax burden

January 5, 2010 | 30,00 EUR | answered by Dipl.BW/SB Ulrich Stiller

Dear Sir or Madam,

I have been offered a turbo termination agreement with a severance payment amounting to 107,000 euros after 27 years of service, due to a threatened termination of employment. The legal notice period is 7 months and will be adhered to. I plan to receive the severance payment in 2010, I am married, and intend to choose separate taxation, as my wife has an additional annual income of approximately 38,000 euros. I am not a member of the church.

Now, here is my problem:
I would like to be released from work, as I do not wish to witness the complete dissolution of my department (media agency). However, my employer will not allow me to stay at home on paid leave, but has made the following proposal. He will cover half of the next 6 months, with the rest covered by me. This means he will increase the severance payment by 3 salaries to 120,000 euros, and I will forgo 3 months. Therefore, in 2010, I will only receive one month's salary of 4,000 euros and will have no further income until I receive my unemployment benefit in August, unless a waiting period is imposed.

My employer mentioned that with such a low income, the tax burden on the severance payment would be very low, possibly better than if I were to receive 24,000 euros for 6 more months.

Is it possible to calculate a sample calculation based on the 1/5 principle for this model?
The release from work is very important to me - as is the concern about handing money over to the tax authorities.

Thank you in advance,
Michael Witt
For further inquiries wittmx@gmx.de

Dipl.BW/SB Ulrich Stiller

Dear seeker of advice,

Thank you for your inquiry, which I would like to answer based on the information provided and in the context of your situation in a preliminary consultation as follows:

Unfortunately, you will have to pay taxes on the severance payment. Applying the "Fünftelregelung" (one-fifth rule) to a severance amount of 120,000 euros and a salary of 4,000 euros, in the case of separate assessment (basic table), an income tax of 22,775 euros plus solidarity surcharge of 1,252 euros will be due on the 120,000 euros, resulting in a payout amount of 95,973 euros in the 2010 income tax assessment. In the case of joint assessment, taking into account your wife's income of 38,000 euros, the income tax would increase to 48,655 euros, as well as the solidarity surcharge to 2,676.02 euros.

Subject to a detailed review, which unfortunately cannot be done for 30 euros, the 120,000 rule should be the most advantageous for you. I hope I was able to assist you.

Best regards,

Ulrich Stiller
Tax Advisor