How is a severance payment treated for tax purposes?
May 23, 2023 | 50,00 EUR | answered by Edith Hartmann
Dear Tax Advisor,
My name is Roberta König and I have been working in a company for 10 years, which is now offering a severance payment due to restructuring. I am unsure about how a severance payment is treated for tax purposes and what impact it could have on my tax liability.
Currently, I receive a monthly gross salary of 4,000 euros and have no other income. The severance payment being offered to me is 30,000 euros. I am concerned that the severance payment could have adverse tax implications for me and would like to learn more about how it will be considered in my tax return.
Could you please show me possible solutions on how I can minimize the tax consequences of the severance payment? Are there any tax planning opportunities that could help me reduce my tax burden? I would greatly appreciate your help in making an informed decision regarding the severance payment.
Thank you in advance for your assistance.
Sincerely,
Roberta König
Dear Mrs. König,
Thank you for your inquiry regarding the tax treatment of a severance payment. I understand that you may feel uncertain and would like to receive more information on this matter.
In general, a severance payment is treated as other income and is therefore subject to income tax. The amount of tax due on the severance payment depends on various factors, such as the amount of the payment, your individual tax rate, and any available tax-free allowances.
In your case, with a monthly gross salary of 4,000 euros and a severance payment of 30,000 euros, the severance payment would likely result in a higher tax burden in the year you receive the payment. It is important to note that the severance payment is taxed as if it had been spread out over several years, which may push you into a higher tax bracket.
However, there are ways to minimize the tax implications of the severance payment. One option is the so-called five-fifths rule, which is designed to reduce the tax burden on severance payments. This rule can be applied when the severance payment is made outside of a regular employment relationship. In this case, the severance payment is evenly spread out over five years, and only one-fifth of the amount is taxed.
Furthermore, tax planning strategies such as shifting income to other years to reduce the tax burden could be considered. It is important, however, that these measures are taken with caution and with consideration of your individual tax situation.
I recommend that you consult a professional tax advisor who can analyze your individual situation and provide you with tailored solutions. A tax advisor can help you understand the tax implications of the severance payment and support you in decision-making.
I hope this information is helpful to you and I am available to answer any further questions you may have.
Sincerely,
Edith Hartmann, Tax Advisor
