The rewetting of long-term drained peatlands leads to the development of eutrophic shallow lakes, gradually inhabited by reed communities. These shallow lakes are characterized by significant nutrient and methane emissions. To gain a better understanding of the fate of organic compounds derived from decaying Phragmites australis litter in both the aquatic phase and underlying anaerobic soil layers, a decomposition experiment was conducted over a period of approximately 1.6 years. The experiment employed bulk and lignin-derived phenol analysis, as well as Fourier-transform infrared spectroscopy. As anticipated, the highest level of decomposition was observed in the surface water body of the shallow lake, while the non-rooted degraded peat exhibited the lowest decay. The bulk mass loss of plant litter decreased with depth from 55–27% across the four decomposition environments. Analysis using infrared spectroscopy indicated that the decrease in mass loss was primarily driven by the breakdown of carbohydrates, which constitute a significant portion of plant litter. Interestingly, the rooted degraded peat layer exhibited the highest degree of lignin decay. Furthermore, the study revealed a preferential loss of vanillin phenols and an accumulation of p-hydroxyl phenols. These findings suggest that the increased methane emissions in rewetted fens may be partially attributed to the demethoxylation of vanillin phenols and the subsequent formation of p-hydroxyl phenols. In conclusion, this study provides valuable insights into anaerobic lignin decomposition of plant litter and sheds light on potential mechanisms underlying methane emissions in rewetted peatlands.