Tax Question: How to minimize hit on lump sum severance pay
my husband was severed in November from his company. he received a lump sum check for approximately a year's salary. he just took a job at another company, but will make about $12,000 a year less than his old job. what can we do to lessen our tax hit for this year, but increase our cash flow for next year. a couple of things i was thinking is to pre-pay a year on our mortgage. we would be able to deduct the interest on our taxes. we have private school tuition that we could prepay--this would help our cash flow, but not our tax situation. we also have one in college. are the 529 plans a good thing to get into? Thanks.
Fri Dec 09, 2005 6:32 pm
efflandt Senior Member
Cash: $ 80.45
Joined: 25 Apr 2005
Location: Elgin, IL USA
Pre-paying your mortgage can save you considerable money, but NO extra tax deduction. What it does is pay down your principal (not interest), but you save years of interest on the pre-paid principal and number of payments is shortened by more that the pre-paid amount. This assumes that no pre-payment penalty applies.
Although, pre-paying shortens the end of the loan, it does not mean you can skip scheduled payments. So make sure that you have enough emergency savings to not run short.
Years ago there was income averaging that could decrease the bite of a temporary income bump, but that has mostly been eliminated, except I think for a very limited types of occupations. So I do not know what could reduce taxes unless you qualify for deductable contributions to 529 or traditional IRA.