Are severance payments tax-free?

Have you received a severance payment and would like to receive it tax-free?

In principle, severance payments are not tax-free, as they have been fully subject to income tax since 2006. Although the tax office accommodates taxpayers with various tax reductions, this does not make it possible to receive the severance payment tax-free. In order to receive the severance payment tax-free, there is exactly one possibility: you must drastically reduce your taxable income without the severance payment or even make a loss in the year the severance payment is made.

With the right investment, which you can claim for tax purposes, you will receive your severance payment tax-free and at the same time achieve high profits from the investment itself.

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Severance tax-free

How do I get a tax-free severance payment?

In order to receive your severance payment tax-free, you must reduce your taxable income enormously in the year of payment by carrying forward losses. This allows you to reduce your taxable income to €0. Under the fifth rule, one fifth of the severance payment is added to €0 and the tax payment due on this one fifth is multiplied by five. This means that you have to pay significantly less if you receive a larger severance payment, but you may still have to pay tax on the one fifth.

How can you now receive the severance payment completely tax-free?

To do this, we have to reduce your taxable income. This is because this negative amount is then deducted from your severance payment before the one-fifth rule is applied. This allows you to reduce the severance payment so that you pay €0 tax on the one fifth.

Severance payment tax-free

The solution to receive your severance payment tax-free

Taxable income can be reduced by expenses or investments that can be claimed for tax purposes. The problem with most expenses is that you don't get your money back!

With other investments such as real estate, you cannot use your severance payment 100% tax-free either, as only 2% - 2.5% of the purchase price of the property can be deducted from tax each year. This only reduces your income slightly in the year of the settlement. Payments into a pension plan can also be tax-reduced, but here too there is a tax-free maximum amount. In addition, you only receive your money when you retire.

Die einzige sinnvolle Lösung hierfür ist der Kauf einer Photovoltaik Anlage in Form von einem
Photovoltaik Direktinvestment. 

You purchase your own solar system on a leased roof and benefit from the electricity generated by the PV system. This is because you can claim a full 62% of the total investment for tax purposes in the year of purchase of the solar system.

You pay for the photovoltaic system with the money that would otherwise be paid to the tax office as tax. If you need more capital, you can easily finance the investment. After the PV investment has paid for itself with a monthly profit surplus, it will generate a high and secure income for you for another 20-30 years.

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Advantages of a photovoltaic investment - tax-free settlement

  • Receive 100% of the severance payment tax-free

    Normally, high taxes of up to 50% are payable on a severance payment. As shown in the calculation, it is very easy to reduce your taxable income by purchasing a photovoltaic direct investment to such an extent that you avoid your severance tax and save several thousand euros.

  • Investment deduction

    In contrast to real estate, where only 2% - 2.5% of the purchase price can be claimed for tax purposes each year, the investment deduction and special depreciation allow photovoltaic systems to be depreciated by 62% in a calendar year. This can reduce your taxable income to less than €0, so that you receive your settlement tax-free.

  • Safe investment

    By investing in a direct solar investment, your money is invested more securely than anywhere else. Thanks to the EEG, you receive a state-guaranteed minimum remuneration for 20 years after commissioning the photovoltaic system. This makes photovoltaic investments one of the safest and most calculable investments of all!

  • High profits

    In addition to the enormous tax savings you make by reducing your taxable income, you also generate high profits from the investment itself. With a direct PV investment, you can expect a return of approx. 6.5% per year.

Severance payment tax-free

Receive severance pay tax-free: Calculation

Calculation example:

  • Severance payment: €100,000
  • Couple, married - no children
  • Tax allowance according to the 2021 income tax table: €19,503 incl. solidarity surcharge and church tax
Joint taxable income in 2021 75.000€
Tax payment (incl. church tax and solidarity surcharge) 16.315€
Tax payment with 1/5 (€20,000) of the severance payment, taxable income €95,000 24.067€
Tax payment on 1/5 of the severance payment (€24,067 - €16,315) 7.752€
Tax payment on the severance payment with fifth rule (5 x € 7,752) 38.760€
Photovoltaic system Total 155.000€
Reduction in taxable income due to IAB (50% of €155,000) 77.500€
New taxable income in 2021 without severance pay (€75,000 - €77,500) -2.500€
New assessment basis for the severance payment of €100,000 after deduction of €2,500 97.500€

One fifth of the severance payment: (€97,500 / 5)

19.500€

⇒ Tax savings: €55,075

⇒ Tax payment on €19,500: €0

⇒ Tax payment on severance pay and taxable income: €0

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Severance payments as extraordinary income

In most cases, you will receive a severance payment if you lose your job. Some employers offer this as part of a termination agreement, but others pay it voluntarily. If severance pay is not paid voluntarily, employees often have the option of receiving compensation for dismissal through a court order.

The severance payment is therefore combined income that benefits from tax relief as extraordinary income. However, a tax reduction does not mean that you will receive your severance payment tax-free - the possibilities offered by the state are not sufficient to achieve this.

Severance payment tax-free

Receive tax-free severance pay through the one-fifth rule?

If you are dealing with the subject of severance pay, there is no getting around the one-fifth rule. This tax relief option makes it possible to spread the severance payment evenly over the next five years.

You therefore pay one fifth of the tax on the severance payment each year. You can find out what the requirements for the one-fifth rule are and how you can calculate the rule exactly on the Severance payment one-fifth rule subpage.

Saving taxes with church tax?

Receiving the severance payment completely tax-free can be complicated. Even if no social security contributions are due, the tax burden to be paid is usually still very high.

One way to reduce the tax payable is to save tax by paying church tax. This is because if you pay church tax, you can apply for a partial remission on your settlement. By submitting a written application to the relevant church, you can save 50% of the church tax due.

However, you should bear in mind that the church tax is only a small part of the taxable amount, so that it is by no means possible to receive the settlement tax-free.

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Severance payment tax-free

Conclusion - avoid severance tax

By making a lucrative and sustainable investment in a photovoltaic system in the form of a solar direct investment, you can receive your severance payment tax-free. This means you pay €0 tax on your severance payment and at the same time save the tax you would have to pay on your taxable income in the year of payment. Compared to other expenses or investments that could reduce your taxable income, you generate very high profits from your photovoltaic investment. In addition, your money is safely invested thanks to the state-guaranteed remuneration and you also protect the environment by generating clean electricity.

⇒ A direct photovoltaic investment is therefore the most lucrative and safest way to invest your money and receive your severance payment tax-free.

Disclaimer: Please note that we do not provide tax advice on this subpage. For details on the subject of tax-free severance pay, please contact your tax advisor for detailed advice on your individual case. 

Would you like your severance payment to be tax-free and need a photovoltaic investment? - Then write to us!

Have you received a severance payment and would like to receive this severance payment tax-free? Then contact us using the contact form.

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