Tax Savings ideas - retired with large separation payment

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kateykillers
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Tax Savings ideas - retired with large separation payment

Post by kateykillers » Wed Oct 09, 2019 1:35 pm

I separated from my former employer in late 2018 as part of a voluntary separation program. I received a large separation payment in January 2019. I compounded this income issue with some large capital gains from sales of my former employers stock in order to increase my portfolio diversification and reduce risk. In retrospect, probably could have delayed this to spread out the gain - but I was anxious to reduce the exposure and allow the proceeds to grow significantly better than that single stock.

The result is that in my first year of retirement I have high income and I'm looking for ways to reduce my taxable income. All I can think of are taking capital losses - but I have a minimal amount available. I did max my contribution to an HSA. I'm seeking any ideas from the community of additional steps I can take. I assume contributions to a solo 401k or other qualified plan cannot offset the W2 income from the separation payment.

Additionally, I am under-withheld for Federal Taxes (and probably state too) and plan to make a payment to bring me up to 110% of my 2018 tax obligation. I file MFJ. Thanks in advance.

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ThePrune
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Re: Tax Savings ideas - retired with large separation payment

Post by ThePrune » Wed Oct 09, 2019 2:03 pm

The best way to "think this through" is to march through the lines of your latest Form 1040 and pay attention to every entry that might reduce your AGI and/or Taxable Income.

One idea that comes to mind lies within your itemized deductions. Do you generally make charitable contributions each year? If so, could you bunch together several future years of charitable giving and make the gift this year? If so, will it make your Itemized Deduction more advantageous that your Standard Deduction?

If increasing your Itemized Deductions appears to be a beneficial strategy, then look at all such components. If you aren't already hitting the $10,000 limit on SALT (State and Local Taxes) deductions, then see if you can maximize this by:
(1) Making your Estimated state tax payments in Dec. 2019 rather than in Jan. 2020.
(2) Making your Winter 2020 property tax payment in Dec. 2019, if your locality allows this.
Investment skill is often just luck in sheep's clothing.

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RickBoglehead
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Re: Tax Savings ideas - retired with large separation payment

Post by RickBoglehead » Wed Oct 09, 2019 2:08 pm

If you are now self-employed with income, a solo 401k can be setup to contribute to, but all those contributions are a percentage of your self-employment income only.
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dandinsac
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Re: Tax Savings ideas - retired with large separation payment

Post by dandinsac » Wed Oct 09, 2019 2:49 pm

Contribute to a tax deductible IRA for your spouse if you haven’t already done so.

GAAP
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Re: Tax Savings ideas - retired with large separation payment

Post by GAAP » Wed Oct 09, 2019 7:32 pm

kateykillers wrote:
Wed Oct 09, 2019 1:35 pm

Additionally, I am under-withheld for Federal Taxes (and probably state too) and plan to make a payment to bring me up to 110% of my 2018 tax obligation. I file MFJ. Thanks in advance.
Are you sure about the under-withholding? All of my separation pay in a similar situation was taxed at the 22% federal supplemental rate -- you would need to be well into the 32% bracket before that was insufficient.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

Dottie57
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Re: Tax Savings ideas - retired with large separation payment

Post by Dottie57 » Wed Oct 09, 2019 8:51 pm

GAAP wrote:
Wed Oct 09, 2019 7:32 pm
kateykillers wrote:
Wed Oct 09, 2019 1:35 pm

Additionally, I am under-withheld for Federal Taxes (and probably state too) and plan to make a payment to bring me up to 110% of my 2018 tax obligation. I file MFJ. Thanks in advance.
Are you sure about the under-withholding? All of my separation pay in a similar situation was taxed at the 22% federal supplemental rate -- you would need to be well into the 32% bracket before that was insufficient.
Ditto this for me!

Raabe34
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Re: Tax Savings ideas - retired with large separation payment

Post by Raabe34 » Wed Oct 09, 2019 9:00 pm

Look into a donor advised fund.

mariezzz
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Re: Tax Savings ideas - retired with large separation payment

Post by mariezzz » Wed Oct 09, 2019 9:02 pm

Congratulations on the retirement and separation pay!

Assuming separation pay doesn't count as income for IRA purposes: You could always get a part-time job so you have enough income to contribute to a TIRA. Even better if they allow 401k contributions, preferably a big percentage of your pay check.

As I understand it, if you're required to make estimated tax payments, the IRS expects the payment by the deadline for the quarter in which the money is received. This means that if you're under-withheld, you should make the payment ASAP to minimize any interest/penalty.
I'd assume that appropriate taxes were withheld from the separation pay. Can't taxes on capital gains wait until you do your taxes?


Whether this will work depends on your state, and whether it makes sense for you to itemize:
(1) Making your Estimated state tax payments in Dec. 2019 rather than in Jan. 2020.

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FiveK
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Re: Tax Savings ideas - retired with large separation payment

Post by FiveK » Thu Oct 10, 2019 12:11 am

kateykillers wrote:
Wed Oct 09, 2019 1:35 pm
Additionally, I am under-withheld for Federal Taxes (and probably state too) and plan to make a payment to bring me up to 110% of my 2018 tax obligation. I file MFJ. Thanks in advance.
An estimated tax payment in 4Q19 will not cover underpayment of your 1Q19 tax liability.

If, however, you can make a withholding payment now, that could get you into the 110% of your 2018 tax obligation safe harbor and avoid penalties.

Do you have a way to make withholding payments now?

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kateykillers
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Re: Tax Savings ideas - retired with large separation payment

Post by kateykillers » Thu Oct 17, 2019 8:37 am

Thanks for the replies. I've been traveling and did not notice the replies until now.

The primary driver of my expected tax under withholding was from the capital gains, not the severerance payment...they did withhold. I have an inherited IRA RMD that I will fully withhold, that will help a bit. If the tax on the capital gains did NOT need to be withheld, then I should be ok...was not aware of that.

My Schwab advisor also suggested bundling charitable contributions as well as a donor advised fund...so I will explore that. I've done a spouse tIRA contribution already (and converted it to Roth...so owe tax on that). I don't expect much else I can deduct, but will continue looking.

Thanks again for the feedback.

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