How to lower my tax bracket after severance payment puts me in 35% bracket?

Thanks for the suggestions. For the 401(k) contribution, I already contributed about $12,000 at my old job before getting laid off. My new employer has a 90-day waiting period before I could enroll in their 401(k), so I've only been contributing there since October. Do I still have the full $23,000 limit across both employers, or does it not reset when I change jobs? Also, I was wondering about the timing of tax-deductible expenses. If I made a large charitable donation in December, would that count for this tax year? And how do HSA contributions work if I switch health plans mid-year?

The $23,000 contribution limit for 401(k) plans is the total across all employers for the calendar year, so it doesn't reset when you change jobs. You've contributed $12,000 already, so you have $11,000 remaining that you could contribute through your new employer's plan before year-end. Any charitable donations made by December 31st will count for this tax year, so a large donation in December would definitely help reduce your taxable income if you itemize deductions rather than taking the standard deduction. Just make sure you get proper documentation for donations over $250. For HSA contributions, the annual limit applies regardless of when you become eligible. However, if you weren't covered by an HSA-eligible plan for the entire year, your contribution limit is typically prorated based on the number of months you had eligible coverage, unless you qualify for the "last-month rule" which could allow a full contribution.

Does this tool actually connect with the IRS or is it just like a glorified calculator? I'm in a similar situation (not quite as high income but still jumped brackets due to a bonus) and I'm nervous about trusting online tools with my tax situation.

Can it handle more complicated situations? I received a severance but also started a side business during my unemployment period, so I have some Schedule C income and expenses to factor in. Would love to know if it could help optimize both situations together.

It doesn't connect directly with the IRS - it's more sophisticated than a basic calculator but doesn't file anything for you. It analyzes your specific tax situation based on the information you provide and gives personalized recommendations. I was skeptical too but found it much more helpful than generic advice online. For your situation with Schedule C income and a side business, yes it definitely handles that! I actually had some consulting income during my between-jobs period, and the tool helped me identify business deductions I hadn't even considered. It looks at your entire tax picture and finds optimization opportunities across different income sources.

Wait, how does this even work? The IRS phone lines are notoriously impossible to get through. I find it hard to believe any service could magically get you to the front of the line when millions of people are calling.

Sounds like a scam to me. Why would I pay some random company when I could just keep calling the IRS myself? Plus, how do I know they're not just collecting my information or something sketchy?

It's not magic - they use an automated system that continually redials and navigates the IRS phone tree until it gets through, then it calls you to connect. It's the same as if you had the time and patience to keep redialing for hours. I was skeptical too, which is why I tried it myself first before recommending. I'm not giving them tax info - they're just connecting the call. Think of it like paying someone to wait in a long line for you. And regarding doing it yourself - sure, if you have hours to waste on hold. I tried for 2+ days before giving up and trying this. The IRS agent I spoke with gave me info that saved me way more than what the service cost.

That's a really good point, I hadn't thought to check that. Is there an easy way to see what percentage they withheld? I just looked at my severance statement and it shows they took out $29,150 for federal taxes from the $132,500 payment. Does that sound right? Also, if I do need to make an estimated payment, how do I calculate the right amount? Should I just multiply the difference between the brackets (35% - 22% = 13%) by my severance amount?

You can calculate the withholding percentage by dividing the federal tax amount by the gross severance amount. In your case, $29,150 ÷ $132,500 = approximately 22%. That's likely the supplemental wage standard withholding rate, which is usually insufficient for large amounts that push you into higher brackets. For estimated tax payments, it's not quite as simple as multiplying the bracket difference by your severance. You need to estimate your total tax liability for the year and compare it to your total withholding. The safest approach is to use the IRS Form 1040-ES worksheet or use tax software to run a projection. If your total withholding for the year is less than 90% of your expected tax liability (or 100% of last year's tax if that's lower), you should make an estimated payment to avoid penalties.

This is bad advice. Severance is almost always fully taxable as ordinary income. The exception for emotional distress only applies to lawsuit settlements specifically for physical injuries or physical sickness, not standard severance packages. Please don't suggest tax strategies that could get OP audited.

I'm in Colorado. Do they have any specific rules about severance or one-time payments that might help me? I hadn't even thought about the state tax implications until now.

Colorado has a flat income tax rate (4.4% for 2023), so unfortunately there's no lower bracket to try to get into. However, Colorado does follow most federal deductions, so any steps you take to reduce your federal taxable income (like 401k contributions, HSA contributions, etc.) will automatically lower your Colorado taxable income too. One Colorado-specific thing to look into: if you made any charitable contributions to Colorado Enterprise Zone projects, you might qualify for a 25% state tax credit on top of your federal deduction. That won't help with your federal bracket issue, but it could significantly reduce your state tax burden.