There is an opportunity to save on unemployment benefits. When employees leave the company, they often receive such monetary compensation.
Related topic: Financial and tax changes in Germany in 2024
However, since 2006, this is no longer exempt from taxes and is subject to regular income tax. Fortunately, with the help of the fifth rule, there is a way to reduce the tax burden.
How to save on unemployment benefits
The fifth rule is a legally mandated tax reduction (Article 34 of the Income Tax Act).
It is called so because it mathematically spreads the unemployment benefit over five years. The reason for this is that the tax rate increases not linearly, but progressively.
Thus, each taxpayer has to pay disproportionately more income tax as their income increases. For individuals, the maximum tax rate of 42 percent applies to gross annual income of 62,810 euros. All incomes exceeding this amount are taxed at the full rate at the maximum tax rate.
If a person receives unemployment benefits and it is taxed along with the regular salary in the corresponding year, this will lead to a huge tax burden. The fifth rule prevents falling into the category of the highest taxes.
The fifth rule applies only to extraordinary incomes. This is income paid as compensation for lost income, including unemployment benefits. Compensation for work over several years is also subsidized.
It refers to income paid within one calendar year but earned over at least two years, for example, overtime pay or vacation pay. The fifth rule also requires income concentration.
This happens if the unemployment benefit exceeds the income that a person would have received by the end of the year if employment had not been terminated.
The income tax for the unemployment benefit is calculated according to the fifth rule in a specific order:
- First, the income tax that applies to the regular salary without the unemployment benefit is determined.
- Then, the income tax is calculated for the regular salary plus 1/5 of the unemployment benefit.
- The difference, multiplied by five, gives the income tax for the unemployment benefit.
If the requirements of the fifth rule are clearly met, the employer must take the fifth rule into account when calculating the salary. Otherwise, it is worth filing an income tax return. Then, the tax office will simultaneously check the fifth rule.
Related topics:
The fifth rule, a tax reduction strategy, is applicable to extraordinary incomes, such as unemployment benefits and compensation for lost income. With the fifth rule, individuals can avoid falling into the category of highest taxes, as it spreads the tax burden over five years due to the progressive tax rate system.
In Germany, the maximum tax rate of 42% applies to gross annual income of 62,810 euros, and all income exceeding this amount is taxed at the full rate at the maximum tax rate. Since unemployment benefits can lead to a substantial tax burden when calculated alongside regular salary, the fifth rule is crucial for individuals receiving such compensation.
