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View Diary: According to USA Today's logic, you should ask your boss for a pay cut (122 comments)

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  •  I did hear of one true case (0+ / 0-)

    it's not quite the same, but is similar.

    A former co-worker and I were both let go and received a pretty substantial settlement.

    Unfortunately, we received it December, meaning that it added to our already high salary. and was taxed at a high amount.

    I believe it did put us up into a new tax bracket.

    Now, had they delayed the payment for a few weeks, it would have come in the new fiscal year, when we were unemployed, so that extra severance amount would have been taxed at a much lower rate.

    Again, not quite the same, but I think this is the kind of case where the urban myth gains ground.

    •  A few things: (4+ / 0-)
      Recommended by:
      Val, Hark, ebohlman, Marie

      (1)  My condolences on you losing your job (hope you got a new one and soon);

      (2)  Yes, you certainly would have been better off financially to get the settlement the following year if you had no income for at least a portion of the year.  You can bet the employer had a reason to pay when they did, and if they would have benefitted by delaying payment they would have sought to do so;


      (3)  The bonus/lump sum/settlement taxed at a higher rate can be a pain in the arse, but should be leveled off when you file your taxes for the entire year.  In other words. the increase could temporarily put you in a higher bracket than normal for the pay period, but if it a quartlery occurance or a once-in-a-lifetime event, your tax liability for the entire year should smooth it out to the extent it should be based on the current rates.  In other words, everyone who encounters this should be due for a refund (or at least a drastic reduction in their overall tax liability).

      •  mostly right (1+ / 0-)
        Recommended by:

        but even if no income bracket changed, paying me in December meant that I was taxed at 33% for that extra 75 thousand dollars, but if I had been paid in January, I would have paid only 25% (or whatever) of 75k.

        Again, this is not really the same as the myth propagated in the article, but it's close enough that once it gets passed between two people, it gets distilled to 'you get punished for making more money'.

        the next full year I made no money except unemployment, and that ran out in October.  I don't know, maybe the math does work out.  If I had gotten the 75k in the new year, I would have had a larger tax liability that year, but as I recall, I ran the numbers both ways and think I lost about 5k in the deal.

        Anyway, the other commenters are right.  THe company did kinda screw me, but it was BP, what do you expect.

        Plus, I'm luckier than a lot of other folks out there.  At least I got a severance.  Most weren't aren't so lucky.

        •  Consider FICA and 409A (2+ / 0-)
          Recommended by:
          Marie, RethinkEverything

          If you are over the FICA limit (currently about 106,000) near the end of the year, you can save the social security portion of the tax.  That might offset, or partially offset, the higher marginal rate.

          Spreading a payment over two years is known as bracket-splitting.  However, doing so can implicate section 409A, which imposes a penalty tax of 20% on certain deferred compensation arrangements.  It is a very technical section of the tax law, with lots of ways to mess up.  So any such arrangement should be scrutinized by a tax lawyer or accountant to ensure that the requirements of 409A are complied with.

          "Well, I'm sure I'd feel much worse if I weren't under such heavy sedation..."--David St. Hubbins

          by Old Left Good Left on Tue Sep 06, 2011 at 05:18:12 PM PDT

          [ Parent ]

      •  You're mixing up two issues (3+ / 0-)

        You're correct that the increase in withholding percentage that occurs after a one-time bonus or severance payment will average out and result in reduced tax liability or a bigger refund. But the other issue still remains: the portion of his severance payment that put him into the next tax bracket will still be taxed at a higher rate than it would have been if he had received it the next year. So he'd still be better off if they'd waited to pay him.

        While it never makes sense to forego income based on tax-bracket considerations, it sometimes does make sense to defer additional income if you expect your total income to be lower in the future. Of course you have to take the time value of money into account when making such a decision.

        "We recommend, as a precautionary measure, that people with respiratory infections should be advised not to blow their vuvuzela in enclosed spaces and where there is a risk of infecting others."

        by ebohlman on Tue Sep 06, 2011 at 04:53:59 PM PDT

        [ Parent ]

    •  your compANY SCREWED YOU (0+ / 0-)


      MJTaylor22--concerned citizen who believes in giving back.

      by mjtaylor22 on Tue Sep 06, 2011 at 02:29:54 PM PDT

      [ Parent ]

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