Is severance pay taxable?

by Christopher Graham and Joseph Kelly

IRS

The U.S. Supreme Court is set to hear oral arguments on the issue of whether severance payments to laid off employees are taxable. The 6th Circuit Court of Appeals (covering Tennessee, Kentucky, Ohio and Michigan) previously decided that severance payments aren’t taxable. See U.S. v. Quality Stores, Case No. 10-1563 (6th Cir. 2012).

The Federal Circuit Court of Appeals held that severance payments were taxable. See CSX Corp., et al v. U.S., 518 F.3d 1328 (Fed. Cir. 2008).

The Supreme Court’s decision — expected sometime next year — will be significant for both employers and employees because both could have claims for tax refunds on taxes already paid on severance if the Supreme Court decides severance pay isn’t taxable.

Employers and employees should already be filing for refunds if they intend to reap the benefits of the Supreme Court ruling that severance pay isn’t taxable.

Tags: Severance pay, tax, employment law

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