What are the tax consequences of a severance payment upon termination of the employment relationship?
June 11, 2023 | 40,00 EUR | answered by Albrecht Schlüter
Dear tax consultant,
my name is Jakob Breitwieser and I am about to terminate my employment. As part of this process, I am due to receive a severance payment. I am concerned about the tax implications that may come with receiving a severance payment. I am unsure about how high the tax burden will be and whether there are ways to minimize it.
Currently, I am in a stable employment and receive a regular salary. The termination of my employment is due to company restructuring and is therefore inevitable. The severance payment has been offered to me as compensation for the loss of my job.
My main concern is that the severance payment could increase my taxable income and therefore lead to a higher tax burden. I would like to find out how I can structure my severance payment in a tax-efficient way to avoid potential tax liabilities.
Therefore, my question to you as an experienced tax consultant is: What are the tax consequences of receiving a severance payment upon termination of employment, and what are the ways to minimize them? Are there any tax planning opportunities that I should consider to reduce the tax burden?
I look forward to your expert advice and thank you in advance for your help.
Best regards,
Jakob Breitwieser
Dear Mr. Breitwieser,
Thank you for your inquiry regarding the tax consequences of a severance payment upon termination of your employment. It is understandable that you are concerned about possible tax payments and a higher tax burden due to the severance payment. As an experienced tax advisor, I am happy to assist you and provide you with some important information on this matter.
In general, a severance payment made in connection with the termination of an employment relationship is subject to income tax. The severance payment is taxed in the year it is received, even if it is paid out over several years. It is treated as other income and added to the taxable income. This can result in a higher tax burden, as the severance payment increases the taxable income.
However, there are ways to minimize the tax burden. One option is to spread the severance payment over several years to reduce the progressive tax rate. The severance payment can be paid out in installments to take advantage of more tax-friendly years and reduce the tax burden. Additionally, a tax-optimized structuring of the severance payment, such as utilizing exemptions and tax reductions, can help reduce the tax burden.
It is important that you consult with a tax advisor early on to optimize your severance payment for tax purposes and avoid possible tax payments. An experienced tax advisor can help you develop the best strategies to make your severance payment as tax-efficient as possible.
I hope this information is helpful to you and I am available for any further questions you may have. Thank you for your trust and inquiry.
Best regards,
Albrecht Schlüter
