Immediate termination of tax advantage for redundancies will no longer be configurable starting from 2025.
Getting Less Tax on Your Severance? A Bit Tougher Starting 2025
Ever glad-handed a chunk of cash from your old job for parting ways? Remember, it's tax season. Now, here's the crunch: the good ol' fifth rule, makin' your tax burden lighter, ain't as easily accessed no more.
Backstory:
Job's over, and the payoff ain't automatic, but it often comes. Taxes attach like a suckerfish to those one-time payouts. To lighten the load, there's the fifth rule: severance pay recipients look like they've earned their regular income plus one-fifth of the severance each year, tax-wise.
Before 2025:
Before the end of 2024, the fifth rule was like a secret handshake for your payroll squad, lowering your tax tally as they calculated it.
Changeup:
Come January 1, 2025, the Growth Opportunities Act of March 2024 stepped in, flippin' the script. The fifth rule isn't mandatory in tax withholding procedures anymore; it's a thing to be considered during income tax assessment. What that means is the tax due on your severance bump is higher right off the bat. Refunds? A later date, via tax decision.
So, What Now?
Instead of your employer, it's time for you to wrangle the tax reduction. How? Start the paperwork: file a tax return. List your severance payment on line 18 of Annex N, your income tax and solidarity surcharge on line 19, and church tax, if applicable, on line 20.
FYI, Currency Accounts Watch Out:
There's a new tax trap lurkin' in the bushes: foreign currency accounts. Be on the lookout!
Now, let's get down to business: severance pay is considered taxable income. Subject to federal and, depending on the jurisdiction, state income tax. Tax treatment varies with package structure (lump sum vs. extended payments).
Steps for You:
- Consult a Tax Pro: Gather your crew, bud – a tax professional. They'll help decipher how your specific package fares tax-wise, identify tax-exempt portions, or suggest ways to minimize that tax liability.
- ERISA Compliance: If your employer's offerin' an ERISA-compliant severance plan, make sure you get the lowdown on terms and tax implications. ERISA compliance requires specific documentation and procedures that'll affect taxation[4].
- Payment Structure: Examine the structure of your severance payout. Extended payments often affect tax withholding compared to a lump sum.
- Benefits Consideration: Also, dial in how severance payments affect other benefits (COBRA premiums, unemployment), which can have tax implications too.
- Document Everything: Keep records of allseverance agreement correspondence. Could be helpful in case of disputes or audits.
Lackin' details on the fifth rule under the Growth Opportunities Act 2024 didn't leave us with the full story. But these steps provide a helpful framework for navigating any tax implications your severance pay's throwin' your way.
- Since the Growth Opportunities Act of 2024 has altered tax withholding procedures, you, as a recipient of severance pay, must now take the initiative to reduce your taxes.
- To do this, you should file a tax return, listing your severance payment on line 18 of Annex N, your income tax and solidarity surcharge on line 19, and any church tax on line 20.
