Tax Savings After Job Loss

The Situation

Kate recently lost her job and had a large severance package that she was given upon separation of her employment. In addition, she also sold Restricted Stock Units (RSU’s), which is non-cash compensation in the form of company stock to reward and incentivize their employees. These two situations combined meant that John and Kate would be looking at a large tax bill due in April.

Questions to Answer

• Are they able to lower the amount of taxes due?
• What tax-saving strategies are available to them now?
• What can they do to save on taxes going forward?

Planning

Some possible recommendations for this situation (depending on their personal circumstances) may include:

• One tax saving strategy is to contribute to a Donor Advised Fund. John and Kate can make one large tax-deductible gift this year, and then over time can distribute the funds to various charities as they see fit. When contributing to a Donor Advised Fund, there is an income deduction up to 50% of adjusted gross income (AGI) for cash and 30% for publicly-traded securities. There is also no tax on investment income.
• Fund a Healthcare Savings Account for Kate. By contributing to a Healthcare Savings Account, John and Kate can set aside pre-tax money from their paycheck, let the savings grow tax-deferred until the money is needed, and then withdraw it tax-free to use for medical expenses.
• Max out 401k contributions for John and Kate. When John and Kate increase their 401k contributions, they are able to take a tax deduction on the contribution now, and that money plus earnings is tax-deferred until it is withdrawn in retirement.
• Complete a non-deductible IRA contribution and conversion. First, they will make a nondeductible contribution to a traditional IRA and then they will convert the traditional IRA into a Roth IRA. The tax savings from completing this strategy can be significant over the long-term. Although, it is best to work with a fee-only financial planner to assist with the process to avoid any unnecessary tax surprises and decide if it is best for your situation.

The time to save money on taxes is during the year and not when you file your tax return. A financial advisor can take an active approach throughout the year to identify and take action on available opportunities.