What tax rates apply to severance payments?
November 2, 2023 | 40,00 EUR | answered by Albrecht Schlüter
Dear tax consultant,
I am currently in the unfortunate situation that my employer has offered me a severance payment. The background is the restructuring of the company, which unfortunately involves the elimination of my position. The severance payment is being offered to me as compensation for the loss of my job.
Now I am naturally concerned about how high the tax rates for this severance payment are and what impact they will have on my financial situation. I am aware that severance payments are generally subject to tax, but I am unsure of the amount of taxes that will be due and how I can prepare for them.
Can you please tell me specifically what tax rates apply to severance payments, so that I can estimate how much of the severance payment will ultimately reach me net? Are there ways to minimize the tax burden or take advantage of tax benefits?
I would be very grateful for your help and advice in this matter. It is very important to me to be well-informed and not to experience any unpleasant surprises regarding the tax burden.
Sincerely,
Anna Waldner
Dear Mrs. Waldner,
Thank you for your inquiry regarding the taxation of severance payments. It is understandable that you are concerned about the tax implications of your severance payment and I will gladly help you answer these questions.
In general, severance payments are considered one-time income and are therefore taxable. The tax rates for severance payments depend on your individual tax rate, which is based on your taxable income. Depending on the amount of your severance payment, you may fall into a higher tax bracket. In Germany, income tax is calculated progressively, which means that as income increases, so does the tax rate.
To provide a specific estimate of the taxes on your severance payment, I would need more information about your current income, tax class, and any other earnings. However, you can roughly expect that about one-third to half of your severance payment will need to be deducted for taxes. This also depends on various factors and can vary individually.
There are ways to minimize the tax burden or take advantage of tax benefits. One option is the so-called "Fünftelregelung," which allows for a tax benefit on severance payments if they are paid out in a year where no other income is present. In this case, the severance payment is spread out over five years and only one-fifth of it is taxed, resulting in a lower tax burden.
It is also advisable to seek advice from a tax advisor to examine and optimize individual tax options. A tax advisor can also help you prepare your tax return accordingly and minimize any taxes that may apply.
I hope this information has been helpful and has provided some clarity on the tax implications of your severance payment. If you have any further questions, please do not hesitate to contact me.
Best regards,
Albrecht Schlüter
Tax Advisor
