Severance reporting!!

[taxguy057]

Need some help on where to report severance pay on tax return. i understand that you can report up to 35000. My client report 5000 of it last year when she filed her taxes herself last year online. It was on of those interview type programs that just asked the question and stuck it on the form... She having me do this year and wants to claim the other 30000, but dont know where to report on forms...

[JohnH]

Are you preparing a North Carolina return by any chance?

[taxguy057]

as a matter of fact i am. i was told it was a rule fo NC returns. just dont know where to put it! Pls help me John! :)

[JohnH]

Here's a link to the NCDR's explanation of how to deduct severance wages.

http://www.dornc.com/practitioner/individu...es/pd-98-1.html

Scroll down to the section that begins "Tax Years 1998 and Later"

The deduction is taken on page 2 of the D-400, line 44.

Keep in mind that not all severance payments are deductible - only those attributable to an involuntary separation from service. Voluntary separations as a part of a general downsizing don't meet the standard. Often this happens - there is a first wave of voluntary separations folloowed by a second wave of involuntary separations. The first group would not be entitled to the deduction but the second group would be. The employer will amost never state in the agreement whether the payment qualifies for the deduction - they simply say "consult your tax advisor". That's why we get paid to read the thing. It's very important that you read the separation agreement that the employer provides - I would not take the deduction without having read the agreement completely, even if it it noted on the W-2.

Speaking of the W-2, it is nice if the severance payment is noted on the W-2, but it it not necessary. You can attach a simple statement to the return explaining why the deduction was taken. Most of your info will come from the explanatoin the employer provides to the employee, but I never attach the employer document - only a one-page summary of the amount paid, the amount deducted, and the reason for the severance payment. I include in the statement that this was an involuntary separation because that is the main requirement.

I think it is possible for the deduction to span 2 years if it was paid in that manner, but I'm not positive. You might want to call or write NCDR to verify that fact if your client's circumstances warrant. I have written them on at least 2 occasions in the past to get clarifications in unusual situations. It's worth having their written reply in your files if the circumstances are unusual, since the tax savings can be $2,000 or more.