Any suggestions to avoid the tax hit on a surplus lump sum payment?
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Lots of incorrect or irrelevant info here.
- The severance paperwork has the exact percentages of deductions.
- You get a severance estimate (then use the percentages from said severance documentation to do the math).
To save on tax withholdings up your allowances to 9.
Consult a professional tax advisor or CPA or Financial planner for real/accurate answers and those that pertain to your personal circumstances.
The severance payment is considered to be ordinary wages and you cannot have 401K deductions made from it. 401K deductions will only come out of paychecks you receive while on the payroll and if you wait until you get the surplus notification to make a change in the deduction it will only affect a couple of paychecks. The Fidelity website has information on the timing of the changes.
Depending on your MAGI an IRA contribution may or may not be deductible.
My wife is getting surplussed and was told that the severance tax being withheld is 28% or 30% .... but looking on here and in general im showing it to be 22%.... for us there is no point to roll it over to IRA... we are using it to pay off bills almost all of it..... since a lot of taxes are being withheld i dont think it will hurt as much in april when paying taxes
When I left in 2019 we had the option to "Defer payment of your Severance Allowance until March of the year following termination of your employment." I would think if you lowered your income the following year, your tax burden would be less by deferring your severance payment.
Some incorrect responses here, and a lot of very smart responses, for which get downvoted. Odd, oh wait, that's someone giving good advice to someone, more than likely a mangers, so its a Union person downvoting it. Makes sense.
@ 13ddqmDT
There is not even a 28% bracket. You do know it’s a tiered system. So even if the OP hits the 24% bracket it’s not like all their income is taxed at that rate. At the 22% bracket agi between $39,467 to $84,200 for single person is taxed at that rate. Head of household or married filing jointly it goes up to $168,400. Their agi would have to be above that to hit the 24% bracket and still then only the portion of income exceeding the 22% bracket is taxed at that rate.
@ 13ddqmDT, maybe. If the withholding is 22% and they are in a 28 or higher tax bracket they may not get a refund. they may not be any refunds as the severance may push them into another tax bracket and if not enough was withheld taxes may be due. As they say, consult a tax professional.
Remember income is in three categories. 1) not taxable, 2) taxed at ordinary rates (3) taxed like long term capital Gains (qualified dividends is taxed the same as long term capital gains)
It’s not a tax hit but a withholding hit. This is an IRS rule.If you are going to continue to work this year you can try to estimate your agi and change the withholding on your W4 at your new job accordingly. Else if you are not going to work you will probably get a tax refund in 2021.
Wow the dumb responses here. OP, dont get your financial advice from an anonymous layoff site. Severance is not taxed as ordinary income but as supplemental so the federal rate is 22% for withholding. You CANNOT ROLL all of IT INTO AN IRA, its considered a contribution and limited to 6500 (7500 if you are over 50) . The best you can do is either contribute to a cash value life insurance (,maximum is limited) or an non qualified annuity. In both cases the earnings are not taxed as its growing and in the case of the cash value LI, you can access the earnings tax free if done right. But keep in mind there are surrender fees if you try to get out early. In both cases you cannot avoid taxes. Depending on your AGI, you maybe able to contribute up to 7500 in a ROTH IRA, chances are you may not be able to do so if you are getting maximum severance.
if you are over 50 you can do catch up contributions to your IRA to reduce your taxable income. I'd highly suggest talking to an accountant or financial planner rather than getting your info from a layoff board.
Oh, then no worries, it will be taxed at maximum rates before you receive it. You'll get some of it back the next time you file your 1040 and State.
Original poster here. Clarification - it is a lump sum SEVERANCE payment due to surplus... not pension payment.
Lump sum payments should be rolled over to an IRA. That gets the money out of AT&T's hands and into Fidelity, Vanguard, etc., or an IRA CD until you know what to do with it. If you don't roll it over, you'll pay income tax on all of it plus what you earned in wages, income, etc. the same year. Do not do this unless you are on the verge of bankruptcy, losing your home, wife/kids, car, and will be homeless. You'll never earn all that money back - at least not for many years.
- as @zfc+13ddqmDT said wait until the beginning of the year or if you’re asking more than likely you were Surplus’d recently. Happened to me last year. I’m hoping I don’t get k–led this year in taxes. Out of 47k, Government took 20k
what @dfc+13ddqmDT said, but usually and generally right after a lump sum to ira rollover, there is a one time large/largish withdrawal that people take, and you will pay taxes on that. Let's say you worked will 11/20, then retired, and took the lump sum, and then a withdrawal form that ira rollover, yes you're going to be paying a lot of taxes that year. It's good to retire in the 1st part of the year, to avoid a big tax year for reasons such as this.
If it's a Lump Sum pension payout, just roll to an IRA account as a rollover. No Tax due until you withdraw from the IRA. Severance payout is ran as payroll, and maximum withholding per IRS.
Minimize or eliminate all other income during same calendar year. Maximize 401k, hsa, and ira contributions. Maximize charitable contributions and other deductions. Sell any under water stocks/investments from non-retirement brokerage account.