Getting laid off is never good news, but it can be a boon to your savings account if you get a severance package. It can allow you to do training while you look for a new job, bump up your emergency fund, or pay off debt. But one thing many people don’t consider is that they’ll have to pay taxes on their severance. In this article we’ll take a look at how to minimize taxes on severance pay.
When you lose your job, the last thing you want to think about is taxes. But if you’re receiving severance pay, it’s important to understand how taxes will play a role. Thankfully, there are several ways to lessen the tax burden.
Here are some tax tips to help you minimize the amount of taxes you’ll owe on your severance pay:
- Check the taxability of your severance pay.
The first step is to determine whether your severance pay is considered taxable income. In most cases, it will be taxed as regular income. However, there are some exceptions. For example, if your severance pay is in the form of stock options, it may not be taxed as income.
- Consider timing your severance payments.
If you have the option to receive your severance pay in a lump sum or in installments, it may be beneficial to opt for the latter. By timing your payments so that they’re received in different tax years, you can minimize the overall taxes on severance pay.
- Take advantage of employer-provided health insurance.
If your employer offers health insurance as part of your severance package, it’s important to take advantage of it. This coverage can help offset the cost of COBRA premiums, which can be expensive.
- Use pretax dollars to pay for health insurance premiums.
If you’re paying for health insurance premiums with after-tax dollars, you’re missing out on a big opportunity to save on taxes. Rather, use pretax dollars to pay for these premiums. This can be done through a health savings account (HSA) or a flexible spending arrangement (FSA).
- Invest in a retirement account.
If you have severance pay that you’re not immediately using, consider investing it in a retirement account. This will help you grow your money tax-deferred or even tax-free.
- Use the money to pay off high-interest debt.
Another option is to use your severance pay to pay off high-interest debt, such as credit card debt. This can be a good way to free up cash flow and save on interest payments down the road.
- Give yourself a financial cushion.
If you’re worried about making ends meet after losing your job, use some of your severance pay to create a financial cushion. This can help give you peace of mind and provide a safety net in case of an emergency.
- Invest in yourself.
Consider using your severance pay to invest in yourself. This could mean taking some time off to relax and recharge or taking a course to improve your job prospects.
No matter what you do with your severance pay, it’s important to understand the tax implications.
- Speak with a tax professional.
For more personalized advice, it’s always a good idea to speak with a tax professional. They can help you understand the tax implications of your severance pay and offer specific tips on how to minimize your taxes.
When it comes to taxes, there’s no one-size-fits-all solution. But by following these tips, you can help ensure that you’re paying the least amount of taxes possible on your severance pay.
Losing your job is never easy. But by understanding the tax implications of your severance pay, you can help ensure that you’re in the best possible financial position. By taking advantage of employer-provided benefits, investing in a retirement account, or using the money to pay off debt, you can use your severance pay to help improve your financial situation. And if you’re ever unsure about the best way to minimize your taxes, be sure to speak with a tax professional for guidance.