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Bill
Bill, Enrolled Agent
Category: Tax
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Experience:  EA, CEBS - 34 years experience providing financial advice
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I was just layed off and will be receiving a large severance,

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I was just layed off and will be receiving a large severance, should I accept it now in tax year 2009 or wait to receive it in tax year 2010? What are the tax implications if it is added to my wages earned in 2009 which will be over $100K

Thanks
Submitted: 4 years ago.
Category: Tax
Expert:  Bill replied 4 years ago.

What is your filing status?

How much will the severance payment be?

How much income do you expect to receive in 2010?

Have you made the maximum contribution to a retirement plan such as a 401(k) plan? Will you be collecting unemployment compensation?

Customer: replied 4 years ago.

Filing Status- Single

Severance will be $102,000

2010 Income=$130,000

Made Max contribution and will need to decide if I will keep or roll it over.

I'm not sure I can collect unemployment compensation

 

Expert:  Bill replied 4 years ago.

What will be the source of your 2010 income?

Are you a resident of TX?

To confirm, if you will elect to receive the severance in 2009 then your gross income will be $202,000 or more?

Customer: replied 4 years ago.

Still unemployed, don't know when I will be working in 2010, so my severance will be my income.

 

I am a resident of Texas, but do not own a home.

Confirmed question. Does the severance put me into a higher tax bracket in 2009 that I will end up paying more in taxes than if I take the severance in 2010?

Expert:  Bill replied 4 years ago.

If I have your income amounts correct - assuming your 2009 total income including the severance would be $202,000 ($100,000 + $102,000) then your federal income taxes would be approximately $48,717. Without the severance in 2009 then your 2009 taxes would be about $19,102.

 

If the severance was paid in 2010 and your other income was $28,000 for a total of $130,000 then the taxes in 2010 would be about $27,500. If the severance was paid this year then your taxes in 2010 based on $28,000 would be about $2,380.

 

So if these assumptions are correct and the severance was paid in 2010, then you would save approximately $4,495 in taxes ($51,097 - $46,602) - [(taxes on severance in 2009 would be $48,717 + $2,380 = $51,097) and (severance in 2010 would be $19,102 + $27,500 = $46,602). However, if you obtain employment in 2010 and make signficantly more than the tax differences change.

 

Also, when you receive the severance pay may affect your unemployment compensation benefits so you may want to contact the TX Workforce Commission.

 

http://www.twc.state.tx.us/ui/bnfts/claimant7.html#seppay

 

Customer: replied 4 years ago.

One of your assumptions is incorrect. My 2009 income will be $130,000 plus the Severance of $102,000 which will give me a total compensation of $232,000 for 2009.

and 0 for next year unless I wait to get my severance until January 2010

Expert:  Bill replied 4 years ago.
On $232,000 then the tax would be $58,617 in 2009 so it would save you even more tax to take the severance in 2010.
Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3078
Experience: EA, CEBS - 34 years experience providing financial advice
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