Receiving a severance pay is just like receiving a W-2 from an employer, it’s taxable! Although, with severance pay there are ways to lessen the tax burden and here’s how:
- Contribute to retirement account
– IRA, 401k and other tax-deferred retirement savings
- Put it towards health expenses
– Health savings account (HAS)
- Time your payout
– Have your severance paid out in two separate years, spread out the payments
- Open a 529 plan
– Support your child’s college education
- Invest in a Donor-Advised Fund
– Support your favorite organizations!
Your severance pay received in 2019 will generally be taxed according to the usual income tax rates, which have decreased starting with the tax year 2018. Your withholding on a lump sum severance payment will be at a flat rate of 22 percent. If you receive severance pay, bonuses and other supplemental income in excess of $1 million, tax will be withheld at a rate of 37 percent.