Severance pay, Fifth Rule, Basic Allowance
November 26, 2009 | 30,00 EUR | answered by Matthias Wander
The following situation:
In 2010, I (married) receive a severance package from my employer (according to §34 Income Tax Act/five-fifths rule) and will be working freelance in 2010. The severance package should be tax-optimized, possibly with a taxable income of zero or negative. Now I will have income from freelance work, which after deducting all costs and taking into account contributions for pensions/health insurance amounts to approximately 15,000 euros, which is the double the basic tax allowance.
How is the taxable income calculated and what is the basis for the tax calculation?
A) 15,000 euros + severance package/5, or
B) 15,000 euros - basic tax allowance + severance package/5
Or more generally: is the basic tax allowance subject to progression proviso?
The difference is significant!
Dear Seeker,
Thank you for your inquiry, which I would like to answer based on the information you provided in the context of an initial consultation as follows:
The tax on the severance payment is five times the difference between the tax on the taxable income without the taxable part of the compensation and the tax on the taxable income, in which one-fifth of the taxable compensation is included.
The prerequisite for applying the five-fifths rule to severance payments is that the payments
- are made as compensation for lost or foregone income,
- are not attributable to the employee's participation in the cause of the damage, and
- represent extraordinary income.
Example:
An employee (tax class III/0) with a monthly salary of 2,500 EUR receives a severance payment of 15,000 EUR in October 2009 due to the employer's termination of the employment relationship as of December 31st. No one-time payments have been made.
Solution:
For the amount of 15,000 EUR, the difference between the annual tax of 30,000 EUR (12 months at 2,500 EUR) and 33,000 EUR (annual income plus 1/5 of 15,000 EUR) must be determined. The income tax attributable to 3,000 EUR (1/5 of 15,000 EUR) is multiplied by 5.
Annual tax without severance payment of 30,000 EUR
1,634 EUR
Annual tax with 1/5 of the severance payment of 33,000 EUR
2,380 EUR
Income tax (1/5 of the severance payment)
746 EUR
The tax for the severance payment of 15,000 EUR is therefore 3,730 EUR (5 × 746 EUR).
If the taxable income is within the basic allowance, no tax is due.
I hope this gives you an initial overview.
Sincerely,
Wander
Tax Advisor
