Can I save taxes on a severance payment?
December 25, 2023 | 40,00 EUR | answered by Edith Hartmann
Dear tax consultant,
My name is Erwin Köhler and I am about to receive a severance payment from my employer. The severance payment was offered to me because my company is being restructured and I am affected by it. The amount of the severance payment is 30,000 euros.
I am concerned that I will have to give a large part of the severance payment to the tax office. Therefore, I wonder if there are ways to save taxes and how I should proceed to optimize my tax result.
I am married, have two children, and in addition to my salary, I also receive rental income from a rented property. I would like to know if it is worthwhile to spread the severance payment over several years to reduce my tax rate or if there are other tax tips that I should consider.
Could you please provide me with information on how to save taxes on a severance payment and what tax options I can use in my situation? I would appreciate receiving a detailed answer from you so that I can plan my finances as best as possible.
Thank you in advance.
Best regards,
Erwin Köhler
Dear Mr. Köhler,
Thank you for your inquiry regarding your severance payment and the tax implications. It is understandable that you are concerned about having to give a large portion of your severance to the tax office. I would like to offer you some tips on how to save taxes and how to best proceed to optimize your tax outcome.
Firstly, I want to point out that severance payments are generally taxable. The amount of your severance payment of 30,000 euros will be considered in your income tax return. However, there are various ways to save taxes:
1. Tax reduction: Severance payments can be tax-favored under certain conditions. If the severance is paid as compensation for loss of employment, a tax reduction may apply. This means that the severance will be taxed at a special tax rate that is lower than the regular tax rate.
2. Fifth rule: If you prefer to spread the severance over several years instead of receiving it all at once, you can benefit from the fifth rule. In this case, the severance will be evenly distributed over five years and only one fifth of the amount will be taxed. This can reduce your tax rate.
3. Tax-free allowances: As a married taxpayer with children, you are entitled to various tax-free allowances that you can use to reduce your tax burden. For example, you can claim child allowances or deduct work-related expenses.
4. Investments: If you invest the severance profitably or put it into a tax-optimized investment, you can also save taxes. For example, you could invest the severance in a tax-optimized retirement plan.
It is important that you consult with a tax advisor to discuss your individual situation and determine the best tax options for you. A tax expert can help you plan your finances optimally and save taxes.
I hope these tips will be helpful to you and that you can use your severance payment in a tax-optimized way. If you have any further questions, please feel free to contact me.
Best regards,
Edith Hartmann, Tax Advisor
