Can I receive my severance pay in installments to save on taxes?
August 14, 2022 | 40,00 EUR | answered by Edith Hartmann
Dear tax advisor,
My name is Robert Wunderlich and I have been working for 10 years in a company that will soon undergo restructuring. As part of this restructuring, I have the opportunity to receive a severance payment. Now the question arises for me whether it is possible to receive this severance payment in installments in order to save taxes.
My current annual gross income is 60,000 euros and I am in tax class 3. If the severance payment is paid out in a lump sum, I would have to pay a high tax rate, which would result in only a small net amount remaining from the severance payment. Therefore, I am considering whether it would be more tax advantageous to receive the severance payment in monthly installments.
I am worried that receiving the severance payment in a lump sum could push me into a higher tax bracket and result in having to give a large part of the severance payment to the tax office. Therefore, I would like to know if it is possible to receive the severance payment in the form of monthly installments and if this would be more tax advantageous. Are there possibly other ways to save taxes on the severance payment?
I look forward to your assessment and possible solution proposals on this matter.
Sincerely,
Robert Wunderlich
Dear Mr. Wunderlich,
Thank you for your question regarding the payment of a severance package in installments to save taxes. I understand that you are concerned about how to best benefit from your severance package from a tax perspective.
In principle, it is possible to have a severance package paid out in installments. However, it is important to note that the tax treatment of severance packages is regulated by law. Typically, a severance package is considered a lump sum payment and taxed accordingly. The severance package is added to normal income and taxed at the individual tax rate. Some employers, however, offer the option to pay out the severance package in installments to reduce the tax burden for the employee.
In your case, with an annual gross income of 60,000 euros and tax class 3, a lump sum payment of the severance package could indeed lead to a higher tax burden. Since the severance package increases your taxable income, this could result in moving you into a higher tax bracket and having to pay a higher tax rate.
One way to reduce the tax burden would be to actually receive the severance package in monthly installments. This would only slightly increase the taxable income each month and you may be able to remain in a lower tax bracket. This could result in you having to pay less tax on the severance package overall.
However, there are also other ways to save taxes on a severance package. For example, you could receive the severance package in the form of tax-optimized benefits or contribute a portion of the severance package to a company pension plan. It is important to seek individual advice to find the best tax solution for you.
I recommend contacting an experienced tax advisor who can help you optimize your severance payment. I am happy to answer any further questions you may have and wish you success in your restructuring.
Best regards,
Edith Hartmann
Tax Advisor
