Are there differences in the taxation of severance payments depending on the reason for termination?
January 25, 2022 | 50,00 EUR | answered by Fanni Siebert
Dear tax advisor,
I am Katja Melzer and I have a question regarding the taxation of severance payments. I was recently terminated by my employer and offered a severance payment. Now I am wondering if there are differences in the taxation of severance payments depending on the reason for termination.
The situation is as follows: My employer terminated me for operational reasons and offered me a severance payment. However, I am unsure how this severance payment will be treated for tax purposes. I have heard that severance payments can be taxed differently depending on the reason for termination and I want to make sure that I do not have any tax disadvantages.
My concerns are that I may have to pay too much tax or that I may not be able to optimize tax benefits. Therefore, I am seeking your help to clarify whether there are indeed differences in the taxation of severance payments depending on the reason for termination and what tax consequences this could have for me.
Can you please explain to me if and what differences exist in the taxation of severance payments depending on the reason for termination and what tax implications this could have for me as the recipient of a severance payment? Are there possibly tax planning options to minimize the tax burden? I thank you in advance for your assistance.
Sincerely,
Katja Melzer
Dear Mrs. Melzer,
Thank you for your inquiry regarding the taxation of severance payments. It is understandable that you are uncertain about how severance payments are treated for tax purposes and what differences there may be depending on the reason for termination.
In general, severance payments are considered taxable as compensation for the loss of employment. The taxation is done according to § 34 of the Income Tax Act (EStG) and depends on whether the severance payment is made as part of a termination agreement or as part of a termination. The reason for termination also plays a role in the taxation.
In the case of a termination for operational reasons, the severance payment is generally taxed according to the so-called fifth rule. The severance payment is evenly distributed over five years and only one-fifth of the amount is used annually for income tax purposes. This can significantly reduce the tax burden. However, this rule only applies to severance payments made as part of a dissolution agreement or a court agreement.
On the other hand, if the severance payment is made as part of an ordinary termination, taxation is done according to the general rules of the Income Tax Act. The severance payment is added to the taxable income and taxed at the individual tax rate. In this case, the tax burden may be higher than when applying the fifth rule.
It is therefore advisable to inform yourself about the tax consequences before accepting a severance payment and to consider possible tax planning options. Ways to optimize taxes could include shifting income to more favorable tax years or using tax allowances.
Overall, it is recommended to consult with a tax advisor early on to assess the tax implications of a severance payment and to find potentially tax-optimized solutions. I am happy to assist you with any further questions and provide individual advice.
Best regards,
Fanni Siebert
