How is it with a severance payment in the case of a termination for operational reasons?
December 31, 2022 | 45,00 EUR | answered by Fanni Siebert
Dear tax advisor,
my name is Eiko Bittner and I have been working in a medium-sized company for 10 years. Unfortunately, I have now been laid off for operational reasons and my employer has offered me a severance payment. I am unsure about how a severance payment works in the case of an operational dismissal and what tax aspects need to be considered.
My current situation is as follows: Due to economic difficulties, my employer had to cut some positions, including mine. Therefore, I was laid off for operational reasons and a severance payment was offered to me. I am relieved that I will at least receive some financial compensation, but at the same time I am worried about the tax implications of this severance payment.
My question to you is: How does a severance payment work in the case of an operational dismissal and what are the tax consequences to consider? Are there ways to minimize the tax burden or take advantage of tax benefits? What deadlines and formal requirements do I need to adhere to in order to avoid tax disadvantages?
I would greatly appreciate it if you could assist me in this situation with your expertise and experience. It is important to me that I can handle the settlement of my severance payment correctly and in a tax-efficient manner.
Thank you in advance for your support.
Sincerely,
Eiko Bittner
Dear Mr. Bittner,
Thank you for your inquiry regarding your severance payment after a termination for operational reasons. It is understandable that you are concerned about the tax aspects and want to ensure that you do not suffer any tax disadvantages. I will be happy to explain to you in detail how severance payments in the case of operational termination work and what tax consequences you need to consider.
In principle, severance payments made in the context of operational termination are taxable. The severance payment is treated as other income and is therefore subject to income tax. However, there are ways to minimize the tax burden or take advantage of tax benefits.
One option is the so-called "fifth rule," which can be applied under certain conditions. With the fifth rule, the severance payment is spread over five years, and only one-fifth of the amount is taxed annually. This can significantly reduce the tax burden. However, the severance payment must be taxed in the year of payment, and there are certain maximum limits for the application of the fifth rule.
Furthermore, there is the option to invest the severance payment in a tax-optimized pension plan or in a support fund. This can allow the severance payment to be invested tax-efficiently and benefit from tax advantages in old age.
It is important to comply with certain deadlines and formal requirements to avoid tax disadvantages. For example, you must conclude a severance agreement with your employer within a certain period of time and correctly declare the severance payment in your tax return. Otherwise, additional payments or even penalties could be imposed.
I recommend that you contact a tax advisor early on to optimize your severance payment for tax purposes and take advantage of possible tax benefits. A tax advisor can provide comprehensive advice and help you take the right steps to minimize your tax burden.
I hope that this information has been helpful to you, and I am available to answer any further questions you may have.
Kind regards,
Fanni Siebert
