Quick Answer
You can't reduce the income tax owed on severance, but you may get substantial refunds since employers often withhold at the highest tax rates (37-42% total). Rolling eligible severance into retirement accounts can defer taxes on that portion. Most people overpay taxes on severance by 15-25%.
Best Answer
Robert Kim, Tax Return Analyst
Best for people receiving standard severance packages who want to minimize their tax burden
How severance taxation works
Severance packages are taxed as ordinary income in the year you receive them, but there's good news: you likely won't owe as much as your employer withholds. Employers must withhold federal taxes at 22% for supplemental wages under $1 million, plus an additional 15.3% for FICA taxes, bringing total withholding to 37-42% depending on your state.
However, your actual tax rate on severance is based on your total annual income, which may be lower than the withholding rate — especially if you were unemployed part of the year.
Example: $50,000 severance package
Let's say you earned $60,000 at your job for 8 months, then received a $50,000 severance package:
But your actual tax liability on $110,000 total income (assuming single filer) would be approximately $18,700 in federal taxes. Since you likely had taxes withheld from your regular paychecks too, you may receive a refund of several thousand dollars.
Strategies to reduce your tax burden
1. Maximize retirement contributions
If your severance pushes you into a higher tax bracket, maximize your 401(k), IRA, and HSA contributions for the year. For 2026, you can contribute up to $23,500 to a 401(k) ($31,000 if 50+) and $7,000 to an IRA ($8,000 if 50+).
2. Consider a severance rollover
Some severance packages qualify for direct rollover to a 401(k) or IRA, avoiding immediate taxation. This typically applies to:
According to IRS Publication 575, these rollovers must be completed within 60 days and follow specific procedures.
3. Time your severance payment
If you have control over when you receive severance (rare but possible), consider:
4. Bunch deductions in the severance year
If your severance creates a high-income year, consider bunching itemized deductions:
Key factors that affect your severance taxes
What you should do
1. Calculate your estimated total annual income including severance
2. Review your tax withholding to see if you'll owe additional taxes or receive a refund
3. Maximize retirement account contributions before year-end
4. Consider working with a tax professional for packages over $100,000
[Use our refund estimator](refund-estimator) to see if your severance withholding will result in a refund, and [scan your prior year return](return-scanner) to identify additional deductions you might qualify for.
Key takeaway: While you can't avoid income tax on severance, most people are overwithholding by 15-25%. Focus on maximizing retirement contributions and planning for a potential large refund.
*Sources: [IRS Publication 15-A](https://www.irs.gov/pub/irs-pdf/p15a.pdf), [IRS Publication 575](https://www.irs.gov/pub/irs-pdf/p575.pdf)*
Key Takeaway: Most people overpay taxes on severance by 15-25% due to high withholding rates, and maximizing retirement contributions can further reduce the tax impact.
Severance tax withholding vs. actual tax liability by income level
| Annual Income | Severance Amount | Withholding Rate | Actual Tax Rate | Likely Outcome |
|---|---|---|---|---|
| $35,000 | $15,000 | 29.65% | 12-15% | $2,000+ refund |
| $60,000 | $30,000 | 29.65% | 22-24% | $1,500+ refund |
| $100,000 | $50,000 | 29.65% | 24-28% | Break even or small refund |
| $200,000+ | $75,000 | 29.65% | 32-35% | May owe additional tax |
More Perspectives
Diana Flores, Tax Credits & Amendments Specialist
Best for people who changed states for work and then received severance
Multi-state severance complications
If you moved states during the year before receiving severance, you'll face additional tax complexity. Your former employer will likely withhold taxes based on your work state, but you may owe taxes to your new state of residence.
Example: Moved from California to Texas
Say you worked in California for 6 months, then moved to Texas and received a $40,000 severance package:
Key strategies for multi-state situations
1. Determine source state rules
Severance is typically taxed where the work was performed, not where you currently live. Some states have agreements to prevent double taxation.
2. File part-year resident returns
You'll likely need to file returns in both states, claiming credits for taxes paid to avoid double taxation.
3. Consider timing if you have control
If you can delay severance until after establishing residency in a no-tax state, you might save significantly on state taxes.
4. Track your move-related deductions
Moving expenses are generally not deductible for most taxpayers under current law, but military members and some other situations may qualify.
Moving across state lines adds complexity but doesn't change the fundamental strategies for minimizing severance taxes. Focus on retirement contributions and proper state filing to avoid overpaying.
Key Takeaway: Multi-state moves complicate severance taxation, but proper filing in both states and understanding source rules can prevent double taxation.
Robert Kim, Tax Return Analyst
Best for younger workers receiving their first significant severance package
First severance package? You're likely getting a big refund
If this is your first significant severance package, there's a good chance you're worried about a huge tax bill. Here's the reality: you'll probably get money back.
Early-career workers typically earn $35,000-$65,000 annually. Even with a substantial severance package, your total annual income likely keeps you in the 12% or 22% federal tax bracket. But your employer withheld at 22% minimum, plus FICA taxes.
Example: $25,000 salary + $15,000 severance
Total income: $40,000
Smart moves for early-career severance
1. Open and maximize an IRA
If your employer doesn't offer a 401(k) or you've left the company, open an IRA and contribute up to $7,000 for 2026. This reduces your taxable income dollar-for-dollar.
2. Don't panic about the tax withholding
The large amount withheld from your severance check is likely more than you'll actually owe. File early to get your refund faster.
3. Use this as a jumpstart for emergency savings
After taxes and immediate needs, consider putting the remaining severance into a high-yield savings account as your emergency fund.
4. Consider Roth IRA contributions
If you're in a low tax bracket even with severance, contributing to a Roth IRA lets you pay taxes now at these low rates.
Don't let the scary withholding amount fool you — your actual tax burden is likely much lower than what was withheld.
Key Takeaway: Early-career workers typically receive substantial refunds from severance packages due to overwithholding, making it a good opportunity to jumpstart retirement savings.
Sources
- IRS Publication 15-A — Employer's Supplemental Tax Guide
- IRS Publication 575 — Pension and Annuity Income
Related Questions
Reviewed by Robert Kim, Tax Return Analyst on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.