How does lump sum severance payment affect tax return and refund?

Severance pay is treated as regular income for tax purposes, but the withholding can be tricky. When companies issue lump sum payments, they often use what's called a "supplemental wage rate" for withholding, which is typically 22% federal (or 37% for amounts over $1 million). This rate might be higher or lower than your actual tax bracket. The good news is that at tax time, everything gets reconciled based on your total annual income. If too much was withheld from your severance, you'll get it back as a refund. If too little was withheld, you might owe more. Since you were unemployed for a couple months, your total annual income might actually be lower than last year, potentially putting you in a lower tax bracket. This could mean a larger refund, assuming the withholding on your severance was at that higher supplemental rate.

After getting laid off last year, I was super confused about my severance tax situation too. I found this tool called taxr.ai (https://taxr.ai) that really helped me understand my specific situation. I uploaded my severance agreement and final pay stub, and it analyzed everything and explained exactly how it would impact my taxes. What was cool is that it showed me some deductions related to my job search that I didn't know I could claim. Since you were unemployed for a couple months, you might have similar expenses that could offset some of the tax impact of your severance.

I tried taxr.ai that was mentioned above after being skeptical at first. Wow, it actually identified that my severance package included unused PTO payout that was being taxed at the supplemental rate but shouldn't have been! Ended up saving me about $680 that I would have just let go. It also explained why my withholding seemed so high and gave me a pretty good estimate of what to expect on my return. Definitely worth checking out if you're confused about how severance affects your taxes.

If you're trying to get clarity directly from the IRS, good luck with that! I spent WEEKS trying to get through on their phones after my severance situation last year. Finally found Claimyr (https://claimyr.com) and they got me connected to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that my severance was indeed taxed correctly at the higher supplemental rate, but explained that I'd likely get a portion back because my total annual income was lower due to my unemployment period. Saved me tons of stress wondering if I was going to get hit with a surprise tax bill.

Ok I need to eat my words. After posting that skeptical comment, I actually tried Claimyr because I've been dealing with a missing refund issue. Got through to the IRS in about 20 minutes when I had previously wasted 3+ hours over multiple days. The agent confirmed what others here have said - severance is regular income but withholding is often calculated differently. For OP's case, since they were unemployed for part of the year, they'll likely see some of that withholding come back as a refund unless their new job pays significantly more than their old one (which could push total annual income higher).

Something important that hasn't been mentioned - did your severance include any accrued vacation or sick pay? Those are sometimes included in severance packages but can be taxed differently. Also, check if any portion of your severance was allocated to things like continued health insurance coverage or outplacement services, as those might have different tax implications.

Has anyone used TurboTax to handle severance packages? Do they have a special section for this or is it just entered as regular income? I'm in the same boat as OP and wondering which tax software handles this situation best.

I went through something very similar last year when I was laid off in February. The key thing to understand is that severance withholding often looks scary but it's usually just being overly cautious. My company withheld about 28% from my severance (federal + state), which felt like a huge chunk. But when I filed my taxes, I got most of it back because my total annual income was lower due to being unemployed for several months, just like your situation. One thing that helped me was keeping track of all my job search expenses - things like career coaching, resume services, networking events, interview travel costs, etc. These can sometimes be deductible and help offset the tax impact of your severance. The bottom line is that the IRS looks at your total annual income, not just individual payments. Since you were out of work for 8 weeks, there's a good chance you'll see a decent refund assuming they overwitheld on your severance. Just make sure to save all your tax documents and consider talking to a tax professional if the numbers seem off when you start preparing your return.

I'm dealing with a similar severance situation right now and this thread has been incredibly helpful! One thing I wanted to add that might be useful - make sure to check if your severance agreement included any non-compete or non-disclosure clauses that came with additional payments. My company paid me an extra amount specifically for agreeing to a 6-month non-compete, and I wasn't sure if that was taxed differently than regular severance. Turns out it's all treated the same as regular income, but having it clearly documented helped when I was trying to understand my W-2. Also, if you received any stock options or RSUs as part of your severance package, those can have different tax implications and timing. Just something to keep in mind as you're preparing for tax season. The main takeaway from everyone here seems to be that the withholding often looks worse than it actually is, especially if your total annual income is lower due to unemployment periods.

One thing that really helped me when I went through a similar severance situation was getting my final pay stub and W-2 from my old employer as soon as possible. Sometimes there can be discrepancies in how different components of your severance package were coded or taxed. In my case, I discovered that part of my severance was incorrectly categorized, which affected the withholding calculations. Getting this sorted out early in the year saved me from having to file an amended return later. Also, since you mentioned being out of work for 8 weeks, don't forget that if you received any unemployment benefits during that time, those are also taxable income. They typically don't withhold much (or anything) for taxes, so you might want to set aside some money from any refund you receive to cover taxes on unemployment compensation. The good news is that with the combination of potentially overwitheld severance taxes and lower overall annual income due to your unemployment period, you're likely looking at a decent refund situation. Just make sure to double-check all your documentation before filing!

Going through a layoff and severance situation can be really stressful, especially when you're not sure how it'll impact your taxes. From what everyone's shared here, it sounds like you're likely in a good position for a refund given that you were unemployed for part of the year. One thing I'd recommend is making sure you have all your documentation organized early - your final pay stub, W-2 when it arrives, any unemployment benefit statements, and receipts for job search expenses. Having everything in one place will make tax prep much smoother and help you catch any potential issues. The overwithholding on severance payments seems to be pretty common based on what others have experienced. Companies err on the side of caution with that flat 22% supplemental rate, but as everyone mentioned, it all gets reconciled based on your total annual income when you file. Best of luck with your tax preparation - it sounds like you'll likely come out better than you're expecting!

I went through a very similar situation two years ago - got laid off in February with a lump sum severance that had what felt like enormous tax withholding. I was panicked thinking I'd end up owing even more at tax time. Turns out everyone here is absolutely right about the overwithholding situation. My company withheld at that flat 22% federal rate plus state taxes, but when everything was reconciled based on my actual annual income (which was significantly lower due to 3 months of unemployment), I got back about $2,800 more than I expected. The key thing that helped me was understanding that your tax liability is based on your total income for the entire year, not just individual payments. Since you were out of work for 8 weeks and presumably earning less during that period, your effective tax rate for the year will likely be lower than what they withheld from your severance. One practical tip: when you get your W-2, double-check that the severance amount and withholdings are correctly reflected. Sometimes there can be coding errors that affect how different parts of your severance package are categorized. Catching these early can save you from having to file amendments later. You're probably in for a pleasant surprise come tax time!

I've been following this thread and wanted to share my recent experience since it might be helpful. I was laid off in December and received a severance package that included both regular severance pay and a payout for unused vacation time. Like many others here mentioned, the withholding seemed really high - about 25% total between federal and state. What I found useful was creating a simple spreadsheet to track my total expected income for the year versus what was withheld from each source (severance, unemployment benefits, new job income). This helped me get a clearer picture of whether I'd likely owe money or get a refund. I also discovered that some of my COBRA health insurance premiums might be deductible since I was unemployed for part of the year. It's worth looking into all the potential deductions related to your employment gap - job search expenses, professional development courses, even some networking costs can sometimes be claimed. The consensus here seems spot on - that 22% supplemental withholding rate companies use for severance is often higher than your actual tax liability, especially when unemployment periods lower your total annual income. Based on everyone's experiences, it sounds like you're likely looking at a refund rather than owing more taxes.

This thread has been incredibly helpful! I went through a similar situation last year when I was laid off in March. The severance withholding looked scary at first - they took out about 28% total - but I ended up getting a substantial refund because my total annual income was lower due to unemployment. One thing I'd add that hasn't been mentioned much is to keep detailed records of any professional certifications or courses you took during your unemployment period. I took some online courses to upskill while job hunting, and my tax preparer said some of those expenses could potentially be deductible as job search costs. Also, if you moved for your new job in March, some of those moving expenses might be deductible depending on your situation. The key thing everyone's highlighted is accurate - it's all about your total annual income, not individual payments. Since you were unemployed for 8 weeks in what would normally be peak earning months, you'll likely see that overwithholding come back to you. Best of luck with tax season - from everything shared here, it sounds like you're in for a pleasant surprise rather than owing more!

I'm in a very similar situation - got laid off in February and received a severance package with what felt like excessive tax withholding. Reading through everyone's experiences here has been incredibly reassuring! One thing I wanted to add that might be helpful is to make sure you understand exactly what was included in your severance calculation. My package included not just the base severance but also prorated bonus, unused sick time, and even a small amount for my company phone reimbursement. Each component might be subject to different withholding rules, though they all end up as regular income on your W-2. I've been using a simple tracking sheet to monitor my total income and withholdings for the year, similar to what Carmen mentioned. With 8 weeks of unemployment, your annual income will definitely be lower than normal, which should work in your favor when everything gets reconciled. The consensus here from people who've actually been through this is spot on - that 22% supplemental withholding rate is typically higher than your actual tax liability, especially with reduced annual income from unemployment. Based on all these experiences, you're probably looking at a nice refund rather than owing more. Hang in there!