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Author: Yikes51 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121313  
Subject: Severance Dilemma Date: 1/21/2005 12:00 PM
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Will someone please offer their advice?

I received a $65,000 lump sum severance (i.e., 9 mos pay) in Nov 2004 as I was laid off from my company. I am considering rehire with this company in 2005 ... out of state. Part of the "re-hire" scenario is that I must repay the pro-rated remained of the severance.

I will be hit hard with taxes in 2004 due to the lump sum bolus. Is there any way for me to recoup my tax "loss" caused by the lump sum. Because I'll have to repay most of it (gross) in 2005?

How can I handle this unique tax situation and not be left holding the bag?
Thanks,
Pat
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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75700 of 121313
Subject: Re: Severance Dilemma Date: 1/21/2005 1:08 PM
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Yikes51: "Will someone please offer their advice?

I received a $65,000 lump sum severance (i.e., 9 mos pay) in Nov 2004 as I was laid off from my company. I am considering rehire with this company in 2005 ... out of state. Part of the "re-hire" scenario is that I must repay the pro-rated remained of the severance.

I will be hit hard with taxes in 2004 due to the lump sum bolus. Is there any way for me to recoup my tax "loss" caused by the lump sum. Because I'll have to repay most of it (gross) in 2005?

How can I handle this unique tax situation and not be left holding the bag?"


I cannot answer your tax question, but you could solve the problem by negotiating to repay on a prorated, "net" basis. I would negotiate so that the severance were the final dollars of income (highest marginal rate) and you might need to be prepared to show your tax return to the employer (or its accountants) for verification.

For example, assume that the 65k severance led to $17,550 in additional FIT (I am assuming 0 state income tax, but state income tax would simply add a few more steps to the calculation). Thus, net severance to you was $47,450 in the aggregate, or $5,272.22 per month.

Assuming that you departed as of October 31, 2004 and you re-start out of state on March 1, 2005, you were out for 4 months (November, December, January and February) and should retain $21,088.88 of the net severance and repay $26,361.10 of the severance to the company (and not 5/9 of 65k or 36,111.11).

If actually dates are not full months, you could prorate per diem.

Here is hoping that one of the resident tax pros can answer your actual question.

Regards, JAFO



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Author: edcosoft Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75703 of 121313
Subject: Re: Severance Dilemma Date: 1/21/2005 1:39 PM
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It depends on when you rehire. If it is in early 2005 the reduction of income will reduce your withholding. If you have repaid it by April 15 you will have recouped the extra tax in the form of reduced withholding by the time you have to pay your 2004 taxes. If this doesn't work becuase it will take longer to repay the bonus, arrange to have enough withholding taken out at the new job so you DO recoup the extra taxes in the form of reduced withholding by April 15. ed

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