What tax obligations do I have when receiving a severance payment?
July 12, 2023 | 50,00 EUR | answered by Albrecht Schlüter
Dear tax consultant,
My name is Katja Altmann and I recently received a severance payment from my former employer. This severance payment has provided me with financial relief, but at the same time I am concerned about my tax obligations regarding this payment.
Background information: I worked for several years in a company that has now been restructured, and unfortunately, I lost my job. As compensation for the termination, I was offered a severance payment, which I accepted.
My concerns revolve around whether I need to correctly declare the severance payment in my tax return and whether I may have to pay additional taxes. I definitely do not want to get into any tax trouble, which is why I am reaching out to you for clarification on my tax obligations regarding the severance payment.
Therefore, my specific question is: What tax obligations do I have regarding a severance payment and how should I declare this in my tax return to avoid possible tax payments? Are there any ways to minimize the tax burden on the severance payment?
I look forward to your professional advice and thank you in advance for your support.
Best regards,
Katja Altmann
Dear Mrs. Altmann,
Thank you for your inquiry and your trust in my professional advice. It is understandable that you are concerned about your tax obligations regarding the severance payment. Severance payments in Germany are subject to taxation and must therefore be reported in your tax return.
In general, severance payments are treated as other income and are subject to the progressive income tax rate. This means that the severance payment is added to your regular income and therefore increases your taxable income. Depending on the amount of the severance, this can lead to a higher tax burden.
To avoid possible tax payments, it is important to correctly report the severance payment in your tax return. This is done in Annex N under the "other income" section. There, you enter the amount of the severance and indicate if the severance is tax-free (e.g. in case of dismissal due to employer insolvency).
There are several ways to minimize the tax burden on the severance payment. One option is to spread the severance payment over several years to lower the tax rate. This can be done through a one-time payment with maturity in multiple years or through an agreement with the employer.
Furthermore, you can claim any work-related expenses or special deductions in your tax return to reduce your tax burden. This includes costs for applications, further education, or moving expenses related to unemployment.
However, it is important that you seek individual advice from an experienced tax advisor to make the most of your tax obligations and options. Each case is unique and requires personalized tax advice.
I hope this information is helpful to you and I am happy to answer any further questions you may have. Thank you for your trust and I wish you all the best for your tax situation.
Best regards,
Albrecht Schlüter
