Severance payments: pitfalls in tax optimization

Those who receive a severance payment can significantly reduce their tax burden by planning ahead. However, there are pitfalls that can ruin an initially well thought-out tax arrangement. Marion Lamberty of FVP Gesellschaft fur Finanz- und Vermogensplanung recommends that employees who received a severance payment in 2017 review their tax strategy in good time before the end of the year.

For many years now, there have been no tax allowances for severance payments. Nevertheless, there may be considerable tax advantages, as the compensation is taxed at a preferential rate. With the help of the quintuple rule, the tax office calculates as if the severance payment had been spread over five years. Even if the tax continues to be due immediately in one sum, lower tax rates apply as a result. The following applies: The lower the normal income in addition to the severance pay, the higher the tax benefits. In the best case, the normal income should be reduced to zero, as the basic tax-free amount then has a fivefold effect. There are a number of pitfalls that can trip up the person concerned.

Severance pay and unemployment benefits

The tax effect of unemployment benefits is often overlooked. Although the wage replacement benefit itself is not taxed, it increases the tax rate for other income due to the progression proviso. The coincidence of the progression proviso and the preferential taxation of severance payments then sometimes produces bizarre results. The tax calculation on the severance pay using the one-fifth rule can then result in three quarters of the unemployment benefit going to the tax office due to the higher tax burden.

Unexpected income in the severance payment year

Even with forward-looking tax planning, income that was not initially calculated, such as a bonus paid in the following year, rental income or similar, often accrues during the course of the year. At first glance, this is a welcome additional income, especially after losing one’s job. But this increased normal income has extremely negative tax consequences in the severance payment year. The tax burden triggered by this can be more than twice the amount of the unexpected income. Taxpayers should therefore review their tax strategy in good time before the end of the year to see if there is any potential for optimization and, if this is the case, take countermeasures by investing in a Rurup policy.

A single employee left the company at the end of 2016. His employer pays the severance pay of 270.000 euros only in January 2017. A good tax strategy, since the employee does not expect any other income in 2017. However, he then receives delayed payments from self-employed consulting work amounting to 10.000 euros and unemployment benefits amounting to 9.000 euros to. After thorough consultation, he optimizes his tax strategy with a Rurup policy with a single premium of 22.620 euros.

The astonishing result: The tax savings mean that the tax office not only finances the single premium for the lifelong supplementary pension of around 100 euros per month, but also almost 4 euros per month in addition.000 euros remain for free use!

Using high tax leverage

In the case of tax arrangements in the severance situation, it is worth calculating the individual case precisely and compensating for additional income. The Rurup policy offers one possibility. Unmarried persons can save up to 23% in 2017.Invest 362 euros tax-privileged for old age, married persons double. 84 percent of this can be deducted as special expenses. Although this maximum amount is reduced by any contributions to the statutory pension insurance that may have to be paid in the same year, there is still sufficient structuring potential in most cases. Thanks to the high tax leverage, anyone who optimizes their tax burden in the severance year in good time before the end of the year by making a one-off contribution to a Rurup policy can finance this additional old-age pension entirely or largely from saved taxes.