Crazy German Tax Law: Fünftelregelung (or how to pay 116% in income tax)

4 days ago

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The Fünftelregelung (one-fifth method) is a German tax law designed to lower the tax burden on large one-off payments like severance by spreading the tax over five years.
A 200,000€ severance with a 50,000€ salary can result in a 116% marginal tax rate due to the Fünftelregelung, making additional income highly taxed.
The regulation unintentionally discourages working in the same year as receiving severance, as earning more can lead to higher taxes than the income itself.
Work-related expenses can be deducted to reduce taxable income, sometimes resulting in a net gain due to the high marginal tax rates.
The tax law creates perverse incentives, such as taking a sabbatical or spending on deductible expenses to minimize tax losses.

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