Which tax class applies to severance payments?
March 27, 2022 | 40,00 EUR | answered by Albrecht Schlüter
Dear Tax Advisor,
My name is Anneliese Wagner and I have been working in a medium-sized company for 15 years. Due to a restructuring, I have been offered a severance payment as my position is being eliminated. This severance payment is meant to secure my last years until retirement, but I am concerned about the tax class that applies to this payment.
I am currently classified in tax class 3, as my husband earns less than I do. Now I am wondering if the severance payment will also be taxed according to this tax class or if there are special regulations for it. I want to make sure that I do not end up paying more taxes than necessary, so it would be helpful to know which tax class applies to severance payments.
My concern is that I do not know exactly how high the tax burden will be on the severance payment and if there are ways to minimize it. I do not want any unpleasant surprises when filing my tax return, so it would be very helpful to have clarity on this matter.
Could you please explain to me which tax class applies to severance payments and if there are ways to reduce the tax burden? I would be very grateful for your assistance in this matter.
Sincerely,
Anneliese Wagner
Dear Mrs. Wagner,
Thank you for your question regarding the taxation of severance payments. I understand your concerns well and would like to provide you with all the necessary information on this matter.
In general, there is no specific tax class for severance payments. The taxation is rather based on your individual income and the tax rates that apply to it. This means that your severance payment is usually taxed at the personal tax rate that also applies to your regular income. So, the tax class 3 is not automatically applied just because you are currently classified in that class.
However, there are some tax peculiarities to consider regarding severance payments. One option is to request a reduced tax rate, which is usually 30% and applied to the privileged part of the severance. The privileged part is determined by the so-called fifth factor, which spreads the severance over five years and thus qualifies for tax benefits.
To minimize the tax burden on your severance payment, you should consider whether you can benefit from the fifth factor rule and the reduced tax rate. It is advisable to seek advice from an experienced tax advisor to find the best possible tax arrangement.
Additionally, you should also ensure that the severance payment does not lead to a higher tax class in your tax return, as this can have an impact on your overall income. It may be wise to strategically divide the severance payment or postpone it to another period to optimize the tax burden.
I hope this information helps you and provides clarity. If you have any further questions or wish for detailed advice, please feel free to contact me.
Sincerely,
Albrecht Schlüter, Tax Advisor
