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Buyouts and early retirement packages are taxable income

McInnis Canyons National Conservation Area near Grand Junction CO_BLM Photo
Some Bureau of Land Management (BLM) employees in Washington, D.C., are being offered financial incentives to move to the agency's Grand Junction, Colorado, office, which is near the scenic McInnis Canyons National Conservation Area pictured above. (BLM photo)

Despite objections from workers and some members of Congress, the Interior Department is moving forward with its plan to relocate about 250 Washington-based Bureau of Land Management (BLM) employees to western states.

The Trump Administration says the move ultimately will save taxpayer dollars, but it's willing to spend some federal cash in the short-term to win over employees who have concerns about moving more than halfway across the country.

The Interior Department is offering employees impacted by its relocation efforts 25 percent of their base salaries as an incentive to move from Washington, D.C., to western states, according to Government Executive magazine.

The affected BLM workers also will receive a permanent change of station allowance, notes the article by senior correspondent Eric Katz, which will let them either accept 60 days of temporary housing and related living expenses or take an agency-funded house-hunting trip to their new location before reporting there.

Interior has not yet determined if it will offer early retirement or buyouts to employees who refuse their relocation mandates, according to the story.

The relocations are big news among federal workers, but such employee shuffling happens in the private sector, too.

Even more common are buyouts and early retirement packages, which Interior is still pondering, as firms and other employers look to downsize.

And regardless of whether Uncle Sam or a corporate bigwig signs your checks, when you take a buyout package, you need to consider the tax implications.

Different names, same tax result: Clearing out employees usually comes in two versions.

Buyouts generally are offered to younger workers. These packages provide the departing employee with a cushion while s/he looks for another job.

Early retirement packages typically are offered to older employees who might already be thinking about packing up their office cubicle.

The amounts offered tend to be based on how long a person has worked at the firm, along with how much paid time off or vacation and sick day s/he has accrued. scheduled with no other goodies offered.

Regardless of the name, these financial incentives to reduce a workforce are not special one-time payments — or in some cases, several payments deferred over the years — that get special tax treatment.

Instead, such voluntary separation incentive payments are considered supplemental wages and are treated similarly to employee cash awards and bonuses.

That means the buyout payments are included as a former worker's gross income and are fully taxable for the tax year in which the payouts are received.

In many cases, the taxes are withheld before the worker gets the package. In some instances, the packages include a gross-up amount that helps cover those taxes.

Note, however, that the withholding amount may be more or less that your ultimate tax rate. This means you could owe more when you file or get a refund of the buyout amount's over-withheld amounts.

In either instance, you should reexamine your tax planning for withholding purposes as soon as you agree to any buyout or retirement package.

Check out your new tax bracket: The first thing you want to look at is exactly what tax bracket you will end up in as a result of taking an incentive payout.

Remember, this is money added to that which you've already banked for the year.

And if you do get another job after taking a buyout, that new income will only add to your potential taxable bracket amount.

While the added spending money is nice, what isn't so pleasant if discovering you're in a higher tax bracket, especially when that realization comes at tax-filing time.

For planning purposes, here are the federal income tax rates and brackets for the 2019 tax year.

 Tax
 Rate

 Single

 Head of
 Household

 Married Filing 
 Jointly or
 Surviving Spouse

 Married
 Filing
 Separately

 10%

 Up to $9,700

 Up to $13,850

 Up to $19,400

 Up to $9,700

 12%

 $9,701 to 
 $39,475

 $13,851 to 
 $52,850

 $19,401 to
 $78,950

 $9,701 to
 $39,475

 22%

 $39,476 to 
 $84,200

 $52,851 to
 $84,200

 $78,951 to
 $168,400

 $39,476 to
 $84,200

 24%

 $84,201 to 
 $160,725

 $84,201 to
 $160,700

 $168,401 to
 $321,450

 $84,201 to
 $160,725

 32%

 $160,726 to
 $204,100

 $160,701 to
 $204,100

 $321,451 to
 $408,200

 $160,726 to
 $204,100

 35%

 $204,101 to
 $510,300

 $204,101 to
 $510,300

 $408,201 to
 $612,350

 $204,101 to
 $306,175

 37%

 $510,301 
 or more

 $510,301
 or more

 $612,351
 or more

 $306,176 
 or more


And if you live in a state that has a personal income tax, don't forget to factor in those amounts, too.

Take your time to decide: The decision to leave a position, especially one you've held for a long time, is not something to be taken lightly even when you've being offered a nice chunk of change to do just that.

Many years ago, the hubby was offered a buyout. He called me to say he had an hour to let the company know his decision.

It was a job he didn't particularly like and he sounded so happy about the prospect of being paid to quit that, being a good wifey, I had to tell him to take the buyout.

It worked out for us. We had an emergency fund. Plus, the buyout was big enough to allow him to take some time to be a full-time cat nanny before he got another job.

I also had a job with health coverage, to which I added the hubby after he quit.

Such considerations, along with the potential taxes, are some of the things you need to think about when you get offered a buyout or early retirement deal.

Don't act in haste, unless you're in a situation like the hubby was and had to decide quickly.

Take your time, weigh the pros and cons of leaving, talk with your spouse or significant other and, of course, consult your financial and tax advisers.

You also might find these items of interest:

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Comments

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Kay Bell

Totally chagrined. Corrected.

Howard Groopman

Cubical? Seriously?

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