What tax implications does a severance payment have on my income tax?
February 3, 2022 | 40,00 EUR | answered by Lorenzo Zimmermann
Dear tax advisor,
I recently received a severance payment from my former employer and am now concerned about the tax implications of this payment on my income tax. My situation is as follows: I was employed by my employer for many years and have now received a severance payment due to company restructuring.
I am wondering if I have to pay taxes on the full amount of the severance payment or if there are ways to save on taxes. So far, I have not had any significant income other than my salary and have never dealt with tax issues related to severance payments. Therefore, I am unsure of how to proceed in this situation and what tax consequences I may face.
Can you please explain to me in detail how a severance payment is treated for tax purposes and what possibilities there are to save or minimize taxes? Are there specific tax exemptions or regulations that I can take advantage of? What documents do I need to submit with my tax return and what deadlines do I need to meet?
I would greatly appreciate your support and guidance in this matter, as I am very concerned about the tax implications of my severance payment.
Thank you in advance for your help.
Sincerely,
Erwin Sauer
Dear Mr. Sauer,
Thank you for your question regarding the tax implications of your severance payment. It is understandable that you are concerned and unsure about how to proceed in this situation. A severance payment is a one-time payment that you as an employee receive from your former employer when the employment relationship is terminated, for example due to company restructuring.
The tax treatment of a severance payment depends on various factors. In general, a severance payment is taxed as other income and is subject to your personal income tax rate. This means that the severance payment is added to your taxable income and taxed accordingly. Depending on the amount of the severance payment, this may result in you moving into a higher tax bracket and therefore having to pay a higher tax rate.
However, there are certain tax-free allowances and regulations that can help you save or minimize taxes. For example, you can take advantage of the so-called "Fünftelregelung," which aims to reduce the tax burden on severance payments. Under this rule, the severance payment is spread over five years and only one-fifth of it is taxed annually. This may result in you paying less taxes overall.
To benefit from this rule, certain conditions must be met. It is therefore advisable to seek advice from a tax advisor like myself to ensure that you receive the most favorable tax treatment for your severance payment.
Regarding your tax return, you must declare the severance payment in the "Anlage N" of your income tax return. Additionally, you should carefully keep all relevant documents such as your employment contract, the severance agreement, and any certificates from your employer, as the tax office may want to review these as part of a potential audit.
As for deadlines: The tax return for the year in which you received the severance payment must be filed with the tax office by July 31 of the following year. If you need an extension, it is important to request it in a timely manner to avoid any penalties.
I hope this information helps you and answers your questions. If you need further assistance or more detailed advice, I am at your disposal.
Best regards,
Lorenzo Zimmermann
