Understanding the Tax Implications of Severance Pay

The tech industry has seen a mass wave of layoffs, leaving many workers wondering what their rights and responsibilities are.^[0] One of the main questions is: is severance pay taxable? According to the IRS, severance pay is taxable income and must be reported on your tax return in the year it was received. However, there are a few strategies to help minimize the taxes you pay on this income.

One such strategy is to request payment of your severance package in two different years.^[1] This will help to keep your taxable income lower for each year. Additionally, you can put some of the money into an individual retirement account (IRA) or a health savings account (HSA) in order to reduce your tax bill.^[1] You may also be able to funnel it into a 401(k).^[1]

Finally, if you received a lump sum payment and it is eligible for capital gains tax treatment, this means that you can pay a lower tax rate on this income than you would on regular income.^[2] It is important to be aware of the tax implications associated with severance pay in order to make the most of your financial situation.

0. “What to know about severance pay amid more layoffs” Townsville Bulletin, 31 Jan. 2023, https://www.townsvillebulletin.com.au/news/world/what-to-know-about-severance-pay-amid-more-layoffs/video/9bbbb95de69d496f5bdd19817bd58fa7

1. “Is Severance Pay Taxable? Affects of Job Loss on Your Taxes” Market Realist, 3 Feb. 2023, https://marketrealist.com/taxes/is-severance-pay-taxable/

2. “Taxes 2023: What Does a Layoff Mean for Your Tax Filing?” GOBankingRates, 30 Jan. 2023, https://www.gobankingrates.com/taxes/filing/taxes-2023-what-does-layoff-mean-for-your-tax-filing