Federal income tax w/held from lump-sum payment

[Jesse]

Taxpayer uses the Federal and State tax refund as a "savings" account and normally receives an excessive refund. The taxpayer will receive a lump sum company buyout and does not want any taxes withheld as they will only end up receiving all or the majority of the amount withheld back in the form of a refund.

Is it possible to have no federal income tax or a lesser amount withheld from a lump sum payment of severance pay?

[ChEAr$]

Taxpayer uses the Federal and State tax refund as a "savings" account and normally receives an excessive refund. The taxpayer will receive a lump sum company buyout and does not want any taxes withheld as they will only end up receiving all or the majority of the amount withheld back in the form of a refund.

Is it possible to have no federal income tax or a lesser amount withheld from a lump sum payment of severance pay?

Only if he can somehow get a new W4 claiming M-14 in place before the check is issued.

[erchess]

I thought

that a 25% withholding for FIT was mandatory or is that only for bonuses?

[Burke]

Even then it may not work if they use the 25% flat rate for supplemental wages. See Pub 15, Section 7. Supplemental wages includes severance pay. It is permissible to combine with regular wages from last payroll period (or current payroll period) and use the tables. Depends on what their computers are programmed for -- and sometimes that means how big this company is.

[Jesse]

Thanks -

My first thought is my taxpayer is not going to get around the withholding.

While researching the State of Wisconsin I came across a form for a withholding agreement to halt the state withholding if for the same employer. I didn't know if something would be possible for Federal, but I haven't come across any exceptions.

Thanks again!

[FEDUKE404]

More info needed

If "'the taxpayer will receive a lump sum company buyout" is it not likely that action, in and of itself, may create additional tax liability totally separate from whatever creates the "excessive refunds" normally received?

What levels of income do you expect on the buyout, and how do you (apparently) feel there would be no overall tax increases due to that one-time event?

FE

[Jesse]

If "'the taxpayer will receive a lump sum company buyout" is it not likely that action, in and of itself, may create additional tax liability totally separate from whatever creates the "excessive refunds" normally received?

What levels of income do you expect on the buyout, and how do you (apparently) feel there would be no overall tax increases due to that one-time event?

FE

The income over the last 5 years for taxpayer has been +/- $60,000. I took the year to date paystub, (just over $30,000), and the amount of the buyout, (just under $30,000), and it will be close to the $60,000 mark. Doing some guesstimates, if no other income for the year, the balance due will be about $800 because the withholding for the first part of the year pretty much covers the years tax liability. For that additional amount an estimated tax payment could be made when the buyout is received.

If more income anticipated for the remainder of the year the withholding can then be adjusted or estimated tax payments made. The normal refund is their “vacation fund” and they won’t be taking a vacation until another job is found.

The Wisconsin withholding agreement is nice in that you calculate the estimated income and the tax liability for the year and request a lesser amount, enough to cover the remaining liability only be withheld. This is new to me so I was hoping maybe there was something I could also do for the federal that I was not aware of.

[FEDUKE404]

Other options

Your logic seems valid and you appear to have everything well under control.

As for estimated taxes, do/will you have enough information to deal with the "paid in at least 90% of liability" rule to dodge any underpayment issues?

Of course, if the client still wants a big refund, just have them pay in $2k or so and mission accomplished!

On a serious note, you might check with payer about the "mandatory" withholding issue on the upcoming distribution. Sometimes there is confusion between "mandatory" and "customary" withholding. Late in 2011 I had a client who was able to take a 5-digit withdrawal from his traditional IRA (lots of deductions available) without raising his overall tax liability 1¢. He told the bank he did not need ANY US/state withholding on the distribution (no paperwork involved) and they complied with his wishes.

BTW: A most interesting approach the way WI treats things!

FE

[Burke]

My first thought is my taxpayer is not going to get around the withholding.
While researching the State of Wisconsin I came across a form for a withholding agreement to halt the state withholding if for the same employer. I didn't know if something would be possible for Federal, but I haven't come across any exceptions.
Thanks again!

Chear$ quoted the only viable option, IMO. Get that W-4 in there and hope it is handled that way by the payroll division. The W4 does allow you to check "Exempt" but I would not recommend it in this case.

[luke]

W4

I agree that W4 is way to go - EXEMPT is not to be used for this purpose - it is specifically for people who did not / will not owe taxes? Also I thought if W4 had more than 9 a copy had to be sent to IRS??

[JohnH]

That's an old rule.
It SHOULD still be in effect, but it isn't.

[Nashville]

Bank Withholding

F E Duke, this apparent inconsistency is due entirely to the withholding requirements placed on employers versus the withholding requirements placed on banks (nonexistent).

During the Reagan administration, Congress actually passed a measure requiring banks to withhold on passbook savings accounts and CDs upon maturation. Every bank lobbyist ran to Washington like cockroaches out of the woodwork, and as a result Congress passed a "technical correction."

The streets of DC were filled with those convention-type lapel stickers that said, "HELLO, My Name is Ooozydollar Megabank."

Simply put, employers are just not that lucky.

[Nashville]

He's Got a Point

Only if he can somehow get a new W4 claiming M-14 in place before the check is issued.

This may sound ridiculous, but believe it or not Harlan is exactly correct. He can claim a ridiculously high number of dependents, and upon receiving the W-4, the employer will be obligated to send a copy of the W-4 to the IRS. This gives the IRS the power to reject the number of withholding allowances if they choose to do so.

By the time they ever get around to it (which I think will be NEVER), the guy has already been paid his severance package.

[Jesse]

This may sound ridiculous, but believe it or not Harlan is exactly correct. He can claim a ridiculously high number of dependents, and upon receiving the W-4, the employer will be obligated to send a copy of the W-4 to the IRS. This gives the IRS the power to reject the number of withholding allowances if they choose to do so.

By the time they ever get around to it (which I think will be NEVER), the guy has already been paid his severance package.

Is there a penalty for putting too many exemptions on the W-4 if anything ever would be checked?

I pointed out to the taxpayer, if you write in "exempt" and sign the W-4 you are not being truthful because the W-4 clearly states:

-Last year I had a right to a refund of all federal income tax withheld because I had no tax liability,
and
-This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.

[Gene V]

w-4

W-4 not required to be sent to IRS

http://www.irs.gov/faqs/faq/0,,id=199643,00.html