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I am going to receive a severance pay check and I want to know how I can avoid the 40% taxes on this. Can I change my withholdings to lower the tax rate? What amount of withholdings would I need to select?

2007-05-03 02:04:24 · 3 answers · asked by J.V. 1 in Business & Finance Taxes Other - Taxes

3 answers

No, you can't. Irregular payments such as annual bonuses and severance pay are subject to withholding at a statutory rate. I believe that it's either 25% or 27.5% for Federal Income Tax, plus 7.65% for FICA, plus whatever your state mandates. You can ask for a higher amount to be withheld, but not a lower amount. This assumes that your payroll department knows what they are doing -- not all of them do.

Keep in mind that underwithholding on a large payout, even at the statutory rate, can leave you with a large tax bill next year, possibly with penalties for late payment. Regardless of the amount withheld, the money is fully taxable so it's normally in your best interest to ensure than enough tax is withheld to cover your liability.

2007-05-03 02:54:08 · answer #1 · answered by Bostonian In MO 7 · 1 0

Effective 1/1/07 the rate is 25% federal mandatory based for irregular payments. This includes bonuses etc. but does not include tips by bartenders/wait staff.

If your effective rate is lower you will get it back later.

You can project out your taxes for 2007 to determine what you need to claim for with holdings for the balance of the year to minimize your other withholdings and thus break even on your 2007 tax return.

2007-05-03 08:59:48 · answer #2 · answered by dillon Y 3 · 0 0

It's not 27% nor 40%. You report the pay as part of your taxable income so depending on your tax bracket, which could be 10%, 15% or more but not 40%.

2016-05-19 06:31:16 · answer #3 · answered by Anonymous · 0 0

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