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Income tax shelter ideas, for job separation pay?

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Income tax shelter ideas, for job separation pay?  Reply with quote  

Guys, I (and many others) lost my job on September 30th due to a workforce reduction. So, I worked 75% of the year, and was paid regular income during that time. I did 401k deductions, etc as usual with that income. I was not given enough notice to front-load the 401k and HSA at a higher rate before being told to GTFO.

So, they gave us separation pay, (payable this Friday) (but they did it lump-sum like a BONUS). Which means they skimmed off a total of 36.9% of taxes from that pay! (25% bonus rate, both SS deductions, and state taxes). They refused to take out deductions for the 401k, and my HSA and such on this pay, ("you are no longer an employee, so don't qualify at that point", blah, blah) so I had NO way to shelter even a dime of it before the huge tax wipe-out.

So, 3/4's of the year regular income, + 1 year basic pay for severance + pay for unused vacation. Add's up to nearly double my normal income for this year.

Are there some ways to shelter some of this separation income, so when I file taxes for this year I get a lot of it back? I'm age 57, and we are talking around $65k needing to be sheltered. The tax bite on this was just short of $24k off the top! I file married filing jointly.

I do have a Roth IRA, but that's after tax, and I haven't made any contributions to this so far this year. Can I also open a regular IRA, and dump $6,500 into that? I could put more into my HSA, but since it's no longer from regular income, that would probably now be after-tax, and can't be deducted? If so, no help there.

Then, I can always pay my property taxes by the end of the year, and get a little shelter there (about $2,200.)

Any other ideas out there?

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Last edited by adamjohnson on Fri Dec 23, 2016 6:56 am; edited 1 time in total
Post Thu Dec 22, 2016 8:07 am
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If your income isn't too high to qualify for the deductible IRA, then yes, you can open a traditional IRA and take the deduction on the 6500.

If your 401k plan doesn't allow for you to deposit after the separation, then that might be about it. There are some other methods you can use that are available from state to state. For instance, in Georgia we have a GOAL scholarship program that allows us to donate up to 5000 of our state income tax to a private school and the deduction ends up lowering state income tax and qualifying as a charitable deduction on Federal, so there is a net savings. There are also GA film industry credits that can be used. Though, like I said, these types of special programs vary from state to state. I would talk to your accountant if you use one.
Post Thu Dec 22, 2016 3:41 pm
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In my case, I prepaid my State Income Taxes for the next year, prepaid my property tax. And I harvested losses on a taxable stock account.

And the over-withholding money will come back to you in April - ie, some of the Fed 36.9%, the SS overage, etc.

SInce you're no longer employed at a 401k company, you're probably eligible to pay into an IRA - you'll need to research your limit. And hurry to start a fund by Dec 31.

But, in my experience, after all of that, they'll keep a bunch of that $24k.
Post Thu Dec 22, 2016 3:41 pm
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Post Mon Mar 09, 2020 6:25 am
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