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Those who have gone this way before....
Old 03-04-2010, 12:24 PM   #1
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Those who have gone this way before....

I have the opportunity to get "bought out" either this June, next June or this December. My original plan in taking this job was to retire when I got 15 years in, which would have been several months back, but that program kinda evaporated.

I have some questions that maybe someone who has been through this might be able to answer (since I've been through almost everyone at the IRS and......). There are two facets to the buy out. The incentive payment and the payoff. The incentive is unearned income by everything I can gather. The payoff is what I am entitled to anyway which would be my salary to date and unused vacation (which will probably be 8 weeks). The employer is telling me that my vacation pay would also be unearned income and not eligible to be sheltered in a 403b. I had read somewhere that sick pay and vacation pay when received within 2 1/2 months of separation are considered earned income. Does anybody have experience with this?
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Old 03-04-2010, 12:32 PM   #2
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When I retired the payment for annual leave (vacation pay) was treated as earned income and included on my W2 -- I retired from the federal gov but yours should be treated the same way. Did not get paid for sick leave so no experience with that.
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Old 03-04-2010, 06:15 PM   #3
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When I retired from the municipal government, all of my 'banked' sick time, vacation time, and comp time were all treated as earned income, and taxed accordingly, and that's how it showed up on my W2 also.
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Old 03-04-2010, 06:56 PM   #4
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Where I w*rked it was the same as Goonie wrote. They added up the value of all accumulated time (sick, vacation, overtime, etc.), wrote you a check, and it was taxed as earned income. Later, when I retired, there was a limited option to just use the accumulated time until it was totally expended. In that case it was also earned income, but spread out over a couple of tax years.

I suppose if you got your vacation time credited to you in one lump at the beginning of the benefit/fiscal year, then some of it might be considered unearned because you got it in advance of actually earning it. My time was credited to me in small pieces on each paycheck, so every two-weeks I was credited with a few hours of sick and vacation time that was "earned" during the previous pay period.

We did get a certain amount of leave time for training each year that was credited in one lump sum at the beginning of the year. But it had no cash value and couldn't be carried beyond the 365 days, so even though it was unearned at the time of receiving it, there was no tax issue if you retired during that year because either you had used it up or you just lost those days.
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Old 03-05-2010, 05:44 AM   #5
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Im about to takle my package and I didnt even think about this.
So, thanks for making me aware of the question.
In my case my severence pay is in consideration for my signing a release of liability of my firm ( I cant sue them for a number of listed potential infractions).
In this case perhaps it isn't earned income. ??
Time to call the accountant.
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Old 03-05-2010, 11:25 PM   #6
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Originally Posted by Ken11 View Post
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In my case my severence pay is in consideration for my signing a release of liability of my firm ( I cant sue them for a number of listed potential infractions).
In this case perhaps it isn't earned income. ??

.
I reluctantly signed one of these to get an extension of health benefits, and a bigger chunk of severance pay. All the severance pay was treated as a big chunk of... pay! So that boosted my AGI for that year, put me in a higher bracket, and lost more of the severance to Fed. income tax.
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Old 03-06-2010, 11:08 AM   #7
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In this case perhaps it isn't earned income. ??
Time to call the accountant.
Yes, call an accountant. But, it will be earned income based on my personal experience. Let us know what he/she says.
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