Cleverly structure severance payments and save taxes!

Lohi plans your severance pay with you to get the maximum tax benefit out of it for you.

There are very many approaches to saving taxes with a severance payment. Here is an overview of the most important adjustment screws. The decisive factor is the date of payment with regard to annual income. Those who cannot benefit from the fifteenths rule should consider payment in installments. Even deferred compensation in company pension plans, Riester or basic ("Rurup") contracts can bring big tax savings. It is therefore advisable to seek advice on this subject in good time if severance pay is on the cards. And it’s best to do this before binding agreements are made with the employer!

Time of payment is relevant for tax purposes!

If the termination occurs toward the end of the year, it is often advantageous to postpone the payment of severance pay until the following January if lower earnings are expected in the following year. Because a period of unemployment follows the dismissal, the total income is usually lower in this time and thus also the personal tax rate.

Wage replacement benefits, such as unemployment benefits, parental allowance, sick pay or transitional allowance are in themselves tax-free, but are included in the progression. So they are included for the calculation of the taxation of the severance pay. For reduced taxation, the severance payment together with the wage replacement benefit and, if applicable, the salary from new employment must be higher than the salary in the previous year.

It can often be financially advantageous, especially for mothers on parental leave, if they lose their jobs and have their severance pay paid out not immediately, but in a year in which they receive no income or parental allowance. Because then a severance payment up to 9.000 euro completely tax-free. Only from the 9th.001 euros are subject to tax.

If, on the other hand, the termination takes place at the end of the first quarter, the annual income received is not yet so high and immediate taxation is not a disadvantage. The income from a new employment relationship also plays a role in the taxation of the severance payment. If a new employment contract is already in place and the new income level is known, this should be considered with regard to the taxation of the severance payment.

Converting severance pay into a pension

For tax optimization, the conversion of part of the severance payment into the company pension plan can make sense. For the last ten years of service of the employment relationship, contributions can still be paid in tax-free retroactively up to the exemption limit. Contributions already paid in are disregarded. This can lead to a significant increase in pension payments.

However, payments into a basic ("Rurup") or Riester contract from the severance payment amount also have an effect on the personal tax burden. Not only can the amount of income be reduced as a result, but in combination with the one-fifth rule, the tax savings have a very strong effect. In extreme cases, one hundred percent of the pension payment can come from tax money.

Consider severance pay in installments

Severance pay does not have to be paid out as a lump sum. It is possible to split the payment into several installments and this can be very advantageous for some constellations. On the other hand, this approach may be detrimental to the one-fifth rule. This depends on the ratio of the amount of the partial payments to the main payment. If the one-fifth rule is of no use anyway, it is better to have the severance payment spread over a period of up to two years.

"Planning a severance payment is a complex matter that is usually very difficult and confusing for private individuals," explains Gudrun Steinbach from the Executive Board. "A Lohnsteuerhilfeverein, such as the Lohi, on the other hand, can easily carry out various test calculations to get the maximum benefit out of the severance pay".

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