Companies can give severance pay to their workers when their employment is terminated. The pay is taxed as ordinary income and the employer must withhold taxes and include the income on the employee's Form W-2 for the year. Employees can reduce the tax burden, however.

You might consider paying some of it into a tax-advantaged retirement or health savings account. Think about putting some of the money into a 529 educational savings account if you're a parent or ask your employer to remit the severance out over two years to avoid tax bracket creep. You can also donate some of it to charity and take the deduction.

Contribute to a Retirement Account

One easy way to pay less tax on severance pay is to contribute some or all of the money to a tax-deferred account such as an 澳洲幸运5开奖号码历史查询:individual retirement account (IRA). The contribution limit is $7,000 in 2024. You can put in an additional $1,000 if you're over age 50. This is referred to as a "catch-up contribution."

Financial experts say that you💖 should try to sock away as much as you can. According to Get Shameless' , a certified financial planner (CFP), you should try to contribute the maximum amount if you can take advantage of that opportunity.

Some employers may even allow you to put your severance pay into your 401(k). The limit for this type of plan is $23,000 in 2024. You can save an additional $7,500 if you're 50 or older.

Put It Toward Health Expenses

Putting your severance money in a 澳洲幸运5开奖号码历史查询:health savings account (HSA) is a great way to plan for future expenses if you don’t want to put the money toward retirement. This approach only works if you have a 澳洲幸运5开奖号码历史♚查询:high-deductible health insurance plan (HDHP), however. The following conditions apply:

• Your deductible must be at least $2,850 for self-coverage or $5.700 for family coverage in 2025.
• Your out-of-pocket expenses are limited to $5,700 for self-only coverage or $10,500 for family coverage in 2025.

Time Your Payout

An easy way to pay less tax is to have your severance paid out in two separate years. Ask if you can have the payments spread out to avoid taking a large tax hit in one year. 🧸Taking a lump sum can mean owing unexpected money on their taxes for some people.

"Receiving a single, large lump-sum payment could push you into a higher tax bracket," says , CFP,🗹 accredited investment fiduciary (AIF) and founder of Tandem Financial Guidance. "That could mean big changes to how much you ﷽owe."

Open a 529 Plan

Consider using your severance pay to invest in a 529 plan if you have kids or want to support a young niece or nephew’s college education. You may even get some state deductions for contributing.

Read through the rules carefully to make sure of the limits so your contribution doesn’t count as a gift. The IRS only lets you give away up to $19,000 in gifts per person per year as of 2025, up from $18,000 in 2024. Anything over these limits will incur a gift tax. You don’t want to cause more of a headache for yourself while you’re trying to lessen your tax burden.

You can also use a 529 to pay off up to $10,000 of your student loan debt under the terms of the Setting Every Community Up for Retirement Enhancement (SECURE) ๊Act of 2019. It may make sense to open a 529 account, get any state tax credits that are available, and then immediately repay student loans.

Invest in a Donor-Advised Fund

A 澳洲幸运5开奖号码历史查询:donor-advised fund is a unique way to offset the taxes you'd pay on your severance while supporting your favorite organization. The best part of a donor-advised fund is that it allows an individual to get the tax benefit and have a say in how an organization receives the money.

💎These aꦅccounts are sponsored by national charitable organizations. They hold your contributions and let them grow for future distributions or grants, according to Landes.

The Bottom Line

Talk to a professional if you’re going to be receiving a 澳洲幸运5开奖号码历史查询:severance package a♉nd you're unsure what you want to do with the money. A certified public accountant (CPA), CFP,🐽 or other financial professional can give you smart ideas even if you think you know what’s best.

“Buyouts are a real gift, so plan accordingly,” says 澳洲幸运5开奖号码历史查询:Peter J. Creedon, chief executive officer of Crystal Brook Adviᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚsors. “You need to see and understand the whole picture befo🎃re making a large financial decision.”