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My friend's job is being eliminated in early May. She's 67 and probably will not work unless she takes something part time later in the year. She has a great seperation package except for the tax consequences. Here are the basic facts:

By seperation she will have received approx $29,000 in salary in 2013 plus $6,000 to $8,000 company bonus based on 2012 company performance, which will be paid April 1. She will keep her company group health insurance for one year after seperation. She will pay only the portion she pays now and the company will continue to pay the balance. She will receive a full year's pay, about $80,000, after seperation.

There's the rub. Prior to 2013 that year's pay for seperating employees was paid in 26 increments on each regular payday. Beginning this year the company will only pay it in a lump sum. So instead of income of $86,000 to $88,000 this year, she will have income of $115,000 to $117,000.

I know the old income averaging I remember from decades ago is gone. Is there any tax relief for the lump sum payment of her seperation pay?

PS - I've already advised her to wait at least until 2014 to take her Social Security. Her income then will probably be Social Security plus $15,000 to $20,000 from her 401K.
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I can't comment on the income tax situation, but this is likely to have an effect on her medicare part B premiums. She will get notices about these and there is an appeal process. She needs to use that process when the notice arrives. Basically she tells the feds her facts. They will agree and then put her on a recorded phone line where she must swear to the facts under penalty of jail time for false statements. -- At least that is how it worked for me.

Gordon
Atlanta
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If her company is paying her health insurance premiums until 2014, she will not have the Medicare Part B until 2014. My question: Would her high income for 2013 affect Part B in that situation?

Donna
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Donna wrote If her company is paying her health insurance premiums until 2014, she will not have the Medicare Part B until 2014. My question: Would her high income for 2013 affect Part B in that situation?

My bet is yes. It certainly will have an affect on her medicare part B premiums in calendar 2015 under your assumptions.

If a person (or family) has MAGI (defined by law) greater than the limit for Tax year 2013, that Federal tax return is not due until April 15, 2014. So that is the earliest that an official statement of income is required to be made. The IRS and Medicare people look at numbers and send out notices roughly in late November or early December 2014 saying you earn $X in 2013. So your medicare part B will be higher beginning January 2015.

Finally, I am pretty sure it is not just medicare Part B, but also Part D that gets a premium hike.

Gordon
Atlanta
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Would her high income for 2013 affect Part B in that situation?

Her 2013 income will affect 2015 Medicare Part B premium.

Phil
Rule Your Retirement Home Fool
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I know the old income averaging I remember from decades ago is gone. Is there any tax relief for the lump sum payment of her seperation pay?

Assuming that your friend is in a good financial position and would not need all of the money in the short term, two thoughts popped into my head.

The first would be to increase contributions her 401k. Even if she isn't going to be at the job for the whole year she should be able to front load contributions in the months that she does.

The second would apply if she consistently supports a charity. If that is the case, she could make an extra gift at the end of 2013 in place of a 2014 gift that she would have otherwise made. Or taking the idea further, she could look into setting up a charitable gift fund. She could contribute money to the fund this year and then ask the fund to make gifts to charities that she suggests in future years.

I would double check the tax consequences of either of these ideas before using them. They are just what struck me at the moment and I don't have the detailed tax knowledge of others on these boards (I mostly follow this board to learn things myself).
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Too late to do much with the 401k contributions, I think, and she cannot contribute after her seperation.

I had also thought about the Medicare premium issue. She will not go on Medicare until the company insurance ends in May 2014. I think, as someone said, she'll be able to show 2013 was a one-time event and avoid the higher premium, or at least most of it. Once 2014 income is used to figure the premium it won't be an issue.

Doesn't seem to be a way around the higher income tax for 2013. Just have to be sure she meets safe haven requirements on withholding to avoid penalties. She hasn't filed 2012 taxes yet so we don't know what that amount will be.
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I suggest you check further into the 401k contribution situation. When I was in a similar position upon leaving a company, I was able to request from HR that a lump sum contribution (up to the annual max) be taken from my final paycheck, which helped with the tax bite. Typically, adjustments to the 401k contributions can be made throughout the year (although sometimes restricted to only one or two changes).

You may also suggest that your friend coordinate with HR/payroll as to how they will calculate withholdings for the final paycheck. Sometimes they withhold a much greater amount (because of the inflated income level), and then you end up with a large refund; it just depends on whether they make an adjustmetn or not. Or, in your friends case, it may need to be adjusted (due to higher than normal income) to ensure that enough tax is withheld to avoid the need for an estimated tax payment later in the year. In either case, coordinating with payroll now to work out the final paperwork before everything is processed is recommended.

Making Trax
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