How to minimize tax hit with severance check

Please share ideas on how to minimize the tax hit due to upcoming severance check. Thanks

 

You may want to start loading up on a boatload of charitable deductions (real or imagined). You get nailed twice as far as I can see. Frist the withholding on it is pretty steep and second, the added income may throw you into the dreaded AMT category when you do your taxes next year negating many of the deductions that might have reduced your tax bill before. Why we put up with an out-of-control IRS and our chaotic tax system is beyond me. Unless your name is Lois Lerhner, taking the 5th wont do you any good so I guess you should just plan on taking it straight up the a#@

 

Great Post!!!!!

 

Swiss bank account?

 

There is, unfortunately, nothing you can do to affect the check. Don't change your deductions, marital status or 401k hoping to squash the taxes withheld. Severance is treated as a 'special payment' per IRS.

That means : on the GROSS number take 28% for Fed, 6.2% socials security (unless you've maxed out), 1.45% medicare and your state usually also gets jacked up to a flat % on 'special payments'.

All you can do us file your taxes as early in 2015 as you can to get your over payments back.

 

If the extra income bumps you into AMT, there won't be an overpayment to get refunded.

 

My wife is a CPA she said to do a tax Average is the only way.

 

What is the exact lingo of a "tax average"? Thanks

 

I voluntarily separated from the company about 2 months back with severance. Federal tax was withheld at the supplemental 25% tax rate. I too was worried about the AMT especially with my wife still working FT. My accountant said I should be OK - no refund but not much owed either. But he noted that the 1% local tax was not withheld either. So if you live in Montgomery County (PA) be sure to file (and pay) with Berkheimer.

 

Thanks for this post as I am in the same position now. I put a call into my accountant so am waiting to hear back from her.

 

Call Fidelity tomorrow and raise your 401K to 25%. They will shelter 25% thru the end of August but not the severance. This is the easiest way to shelter income but do it asap. If you need every penny you can't do this but you will save good money.

 

Good Call. Thanks

 

Fyi You can do it on Fidelity's website

 

Dont think we can income average to help minimize taxes on severence. Rules changed several years ago to only allow farmers and fisherman to use this method.

 

There is nothing you can do. You basically will take a big hit-especially if you have double income. You just have to suck it up and deal with it.

 

Max out your 401(k) now, but this will apply only to your current salary, not to severance or any in-lieu-of bonus.

Max out your IRAs (but this is little help, of course).

If your severance is at the end of the year, you can delay signing the agreement (but not too long!) and the check will hit next year. I'm guessing your severance is approaching before then.

Are you thinking of starting a business? Lots of opportunities to invest and shelter that income.

 

Isn't everyone getting severance the same time? Late August or earlier if they sign the papers?

Checks will all hit this year!

I want my job back!!!!!!!!!!!!!

 

First you have to figure out what you need most. If that is cash on hand DO NOT go throwing a bunch, or even the max, into your 401k! Once it's locked up there you will be PENALIZED if you need it before the regulatory age you can touch it.

The tax calculations for the 28% Fed, 6.2% social (if you haven't maxed), 1.45% Medicare and elevated state (minus those in income tax free states - NH, FL, TX, WA, AK) are spot on. Use those percentages to model your severance payment and figure out if maxing your 401k to get some of that tax back is worth locking up the cash.

Good luck!

 

I would recommend any expensive medical or dental care (braces) be done so they can be deducted. Also, I would not keep my money in Fidelity-- fees too high. Roll it over into an IRA. Index funds are much cheaper.

 

Yeah, spend thousands to recoup a few hundred. Sounds like Merck math.

The Fidelity advice is good - you haven't totally lost your mind yet.