Timing question ...

[merlin3942]

Hi everyone, After years of adopting the LBYM philosophy, I'm planning on joining the ranks of the FIREd at the end of 2015 at the age of 58. One of the "benefits" my company offers is to "buy back" our unused sick days accumulated over the years at 50% of current salary at time of retirement. I've stayed pretty healthy for the past 35 years, and assuming I stay healthy this year, that "buy back" option will be worth roughly 68K. My question has to do with which "tax year" it would be smartest to count that income against - the last year of full employment (i.e. arrange to receive that in 2015), or time it so that payment is deferred to 2016, when my employment income essentially drops to zero? At first I thought the obvious answer would be to receive that in 2016, but the marginal tax hit in 2015 might actually be less then than going from 0 to 68K in 2016? What all do I need to consider in making that decision?

 

[dallas27]

What take the 50% hit in pay? Can't you use them up?

You did earn them.


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[merlin3942]

What take the 50% hit in pay? Can't you use them up?

You did earn them.


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Well, according to "official policy", if you take more than 3 sick days in a row, you need a note from your health care provider to document your illness, and I'd have to come down with something pretty serious to essentially take the next 1.5 years off!

We have always gotten sick days separately in addition to "earned vacation days". Any left-over vacation days will be bought back at 100% ... but I do plan on using all of those up this year!

Since many/most of those sick days were accumulated over years when my salary was considerably less than what it is currently, I still view that as a pretty generous benefit. If they paid me just what they were worth when they were earned (FIFO), it would probably be less than what the current 50% buy-back offer would be.

 

[MRG]

Well, according to "official policy", if you take more than 3 sick days in a row, you need a note from your health care provider to document your illness, and I'd have to come down with something pretty serious to essentially take the next 1.5 years off!

I understand, if we were off more than 5 days, you were put on FMLA and had to get your doc to fill out the paperwork.

We got nothing for unused sick days, so sounds like a great deal to me. I'd probably take the money and pay the tax unless it created a large change in your taxable%.



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[RetireBy90]

I don't know your 2015 projected income without the buy back. I would estimate my 2015 income (based on 2014 probably)and add in the $68K, then what is the total tax on that AGI, then do the same for 2016 and compare how much of the $68K you get to keep in each year and do it in the year you get to keep the most. I would think that either way you will get a jump into a higher tax rate for some or all of the $68 but in 2015 you may get jumped into a higher bracket than you would in 2016. You may also be able to use the $68K as most of the living expenses for first year of FIRE and not need to draw any from retirement funds. Since you asked

 

[Animorph]

Waiting until 2016 will place some of that $68k into the "0%" bracket (covered by deductions), and the 10% and maybe 15% bracket, assuming no other income. The average of all that will definitely be less than paying 15% to 25% in 2015 when it sits on top of your normal income.


If you had a bunch of 15% tax bracket left in 2015 and enough other income in 2016 to start your $68k in the 15% tax bracket then it might be a wash.

 

[pb4uski]

I would wait and if you have a 401k (or similar program) see if you can max out your 401k for the year so you would only be taxed on $68k less the amount deferred into your 401k.

 

[Dog]

Great benefit. I left a ton of unused sick days on the table.

 

[meierlde]

One other factor depending on where you fall in the social security benefit formula is that it adds another year of earnings on. Now if your average monthly wage is over 4980 the amount is not so much but under it you get a 32% replacement particularly if you replace a zero year. (Note however that if you exceed the cap in 2015 you would pay only the medicare tax on the amount).