What tax benefits does a severance payment bring?
January 10, 2024 | 40,00 EUR | answered by Albrecht Schlüter
Dear tax advisor,
My name is Ingo Peters and I have been working for 15 years in a company that is now planning a restructuring and offering me a severance package. I am faced with the decision of whether to accept the offer and I am wondering what tax benefits a severance package brings.
Currently, my monthly gross salary is 4,000 euros, and the severance package amounts to a one-time payment of 30,000 euros. I am concerned that the severance package will be heavily taxed, leaving me with little at the end. Are there ways to reduce the tax burden?
I also wonder how the severance package will affect my income tax and if it is advisable to receive the severance in installments to take advantage of tax benefits. Are there tax planning opportunities that I should consider in order to keep as much of the severance as possible?
I would greatly appreciate it if you could answer my questions and provide me with possible solutions to maximize the tax benefits of a severance package.
Thank you in advance.
Sincerely,
Ingo Peters
Dear Mr. Peters,
Thank you for your inquiry regarding the tax benefits of a severance payment. It is understandable that you are concerned about the tax implications of your severance payment and how you can possibly reduce them.
In general, severance payments are subject to income tax as they are considered other income. However, there are various ways to optimize the tax burden. It is important to know that severance payments up to an amount of 30,000 euros are tax-free if they are paid within the framework of a judicial settlement or an amicable termination of the employment relationship. In your case, the severance payment would therefore be tax-free.
Furthermore, through a clever design of the severance payment payout, you may be able to take advantage of tax benefits. A payout in installments may result in you falling into a lower tax bracket in the years of payout, thus reducing the overall amount of taxes you have to pay. A partial taxation of the severance payment is also possible, where only a portion of the severance payment is taxable.
However, it is important to note that optimizing the tax implications of a severance payment depends on individual factors such as your tax bracket, other income, or tax prepayments. Therefore, I strongly recommend that you seek advice from an experienced tax advisor who can analyze your personal situation and provide you with specific recommendations.
Overall, there are indeed ways to reduce the tax burden of a severance payment and retain more of your money. It is best to seek individual advice to find the best possible solution for your personal situation.
I hope that this information has been helpful to you and I am at your disposal for any further questions.
Best regards,
Albrecht Schlüter
Tax Advisor
