REDUCING TAXES ON SEVERANCE PAY
In September 2011, the Hewlett-Packard Company ousted Léo Apotheker as its Chief Executive Officer after just 11 months on the post. His severance pay included $7.2 million to be paid out for more than 18 months, a $2.4 million bonus, over $3.5 million worth of restricted stock, and relocation expenditures, including $300,000 to cover losses or other costs relative to the sale of his California house. Also, HP shouldered his legal fees to negotiate the package.
While most Americans cannot receive huge termination pay, they can find ways to lessen the taxes on their severance.
Set timing for payout. Divide the payout of severance in two different years. Find out if you can have the payments spread out. That way, you can avoid paying a huge amount of tax in a year. Receiving a lump sum pay can push you into a higher tax bracket.
Allocate the severance pay on health costs. Especially those who have high-deductible health insurance plans, placing the money in a health savings account (HSA) is a great way to plan for future expenses.
Deposit the pay into retirement account. Contribute to a tax-deferred account such as individual retirement account (IRA). This year, the contribution limit is $5,500. If you are over 50, you can put $1,000 more. Try to contribute the maximum amount, if possible.
Open a 529 plan. If you have children or wish to support a niece or nephew’s schooling, invest it in a 529 plan. You will possibly get some deductions for making a contribution. But, read the rules thoroughly to know the limits so your contributions won’t be considered a gift.
Invest in donor-advised fund. The private fund enables you to support your favorite institution and offset the taxes on your severance pay at the same time. Administered by a third party, the accounts are backed and managed by national charitable organizations.
Seek help in finding next job. Obtaining access to a good job search consultant has become more valuable than before, given the tough labor market today. Nevertheless, do not let this fact dampen your spirits. Ask for a letter of recommendation from people at several supervisory levels. If leaving on good terms, you can consider getting consulting work to somewhat jump-start self-employment.
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