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Left Your Job This Year? Why Your Tax Bill May Be Higher, and What to Do Before December 31 · Align Your Retirement

• 0:00
  Hey Welcome back to Align Your Retirement.
• 0:02
  I'm Hazel Seco, CFP and CDFA, founder of Aligned Financial Solutions.
• 0:07
  We're fee-only advisors and fiduciaries 100% of the time.
• 0:11
  Today's episode is for anyone who left a job this year and assumes her taxes will be lower because of it.
• 0:18
  They might not be, and there is still time to do something about it.
• 0:21
  Let's get into it.
• 0:22
  When a woman leaves a high-paying job, whether she retired, was laid off, or walked away on her own terms, there is a quiet assumption underneath everything that follows.
• 0:33
  Her salary stopped, so her taxes must be dropping too.
• 0:36
  Then April comes, and the bill is bigger than it was while she was working.
• 0:40
  Not because anyone made a mistake, but because of everything that got paid out in the year she left.
• 0:46
  The final paychecks, the bonus for last year, the severance, the stock that vested on her way out, the vacation days she never used.
• 0:55
  All of it lands on one tax return, and most of it had tax taken out at a rate that was too low for her.
• 1:02
  So today, I'm going to walk through one hypothetical woman, Monica, who left her job in June.
• 1:08
  I'll show you what landed on her tax return that she didn't expect, why the withholding was short, what she can still change before December 31st, and the one date in January that matters if you're in her position.
• 1:22
  I'm Hazel Seco.
• 1:23
  I'm a certified financial planner, a CDFA, and a fee-only fiduciary.
• 1:27
  One note, I'm a financial advisor, but I'm not your financial advisor.
• 1:31
  This is education, not advice.
• 1:33
  Grab something to write on.
• 1:34
  Let me introduce you to Monica.
• 1:36
  Monica is fifty-eight.
• 1:37
  She earned two hundred and fifty thousand dollars a year as a director at a pharmaceutical company, and she left in June.
• 1:43
  Half a year of salary, so she figured this would be a half-salary tax year.
• 1:48
  She even thought about pulling some money from her 401k in the fall since her income was low.
• 1:53
  Here's what actually landed on her tax return this year.
• 1:56
  Her salary through June, the bonus for last year, which was paid in March, six months of severance, paid as one lump sum in July, a block of company stock that vested in her final month, and a payout for the vacation days she never used.
• 2:10
  Add it up, and Monica's income this year is close to four hundred thousand dollars.
• 2:15
  That is more than she ever earned in a full year of working.
• 2:19
  She stopped working in June, and she's having the biggest income year of her career.
• 2:23
  One more thing to check if it applies to you.
• 2:26
  If you have deferred compensation and your plan pays it out when you leave, that lands in this year too.
• 2:31
  And the election you made years ago generally can't be changed now.
• 2:35
  It can be the largest number on the whole return.
• 2:38
  Now, look at what came out for taxes.
• 2:40
  Seeing tax withheld on every payment doesn't tell her whether enough was paid.
• 2:45
  Bonuses, severance, and stock vesting are what the IRS calls supplemental wages, and most employers withhold a flat twenty-two percent on them.
• 2:53
  Not your rate, a flat twenty-two percent.
• 2:55
  The same for everyone.
• 2:57
  At close to four hundred thousand dollars of income, Monica's top federal Her rate is 35%.
• 3:02
  If Monica files as single and her taxable income puts her in the 35% federal bracket, withholding at 22% on those payments may leave a gap.
• 3:12
  She could still have a substantial balance due even though tax came out of every payment.
• 3:17
  Here's the check to do before the year ends.
• 3:20
  Pull your last pay stub and your severance statement and add up the federal tax withheld so far this year.
• 3:26
  Compare it with 110% of the total tax on last year's return.
• 3:31
  If what you've had withheld is already above that line, you won't owe a penalty, but you will still owe the difference in April.
• 3:38
  So set it aside now.
• 3:40
  If you're below that line, make an estimated payment by January 15th, 2027, the final regular estimated payment deadline for 2026.
• 3:49
  It won't erase every dollar of penalty, but it stops it growing.
• 3:53
  January 15 is the date most people miss because by January they think last year is over.
• 3:58
  And if you still have a final paycheck or a retirement distribution coming this year, extra withholding before year-end may help because it's generally treated as paid throughout the year.
• 4:08
  Now, here's the part people get backwards: the moves that help in a normal low-income year hurt Monica this year.
• 4:15
  Everything I just listed already happened.
• 4:18
  Monica can't change it.
• 4:19
  What she can control is what she adds on top before December 31st, and this year, the answer is as little as possible.
• 4:27
  She was thinking about a 401withdrawal this fall.
• 4:30
  A taxable withdrawal would add to an already high-income year.
• 4:34
  If she can cover her spending from severance and saving, she should consider comparing the cost of withdrawing this year with next year.
• 4:42
  She also needs to check the e- early withdrawal rules.
• 4:45
  There's an age 55 rule for 401s.
• 4:48
  If you leave your job at age 55 or older, you can usually withdraw from that employer's 401without the 10% early withdrawal penalty.
• 4:57
  Since Monica left her employer at 58, she may be eligible for this exception on withdrawals from that 401account.
• 5:04
  This exception is specific to the 401plan linked to the job she just left and does not apply to IRAs.
• 5:10
  She had also read that a Roth conversion makes sense in the year you leave work.
• 5:16
  It can- If your income falls enough, a conversion next year could cost less if her income and tax rate fall.
• 5:23
  Before she adds a withdrawal, conversion, or investment gain, she needs to compare this year with next year.
• 5:29
  Waiting may help if her tax rate falls.
• 5:31
  But if she needs the money or too much of her savings is tied up in company stock, the tax bill can't be the only consideration.
• 5:39
  She can't undo the severance payment, so what can she still change before the year ends?
• 5:45
  Three moves can still reduce Monica's tax this year, as long as they happen before December 31st.
• 5:51
  First, charitable giving, if she itemizes.
• 5:55
  If she gives every year, this is the year to give more because a deduction is worth the most in her highest rate year.
• 6:02
  Starting in 2026, the first half a percent of income you give no longer counts, so bigger gifts matter more.
• 6:10
  A donor-advised fund lets her put several years of giving into this year's deduction and decide on the charities later.
• 6:17
  Second, losses in her brokerage account.
• 6:20
  If she has investments that are down, selling them before year-end offsets gains and a small amount of ordinary income.
• 6:28
  The vested company stock she now holds is a good place to look.
• 6:32
  Check the wash sale rules before buying the investment back.
• 6:35
  The wash sale rule means that if you sell an investment at a loss and buy up a substantially identical investment within 30 days before or after the sale, you cannot claim that loss for tax purposes.
• 6:46
  Third Check whether she has unused HSA contribution room.
• 6:51
  To be eligible to contribute to a health savings account, she must have been enrolled in a high-deductible health plan for at least one month this year, had no other health coverage, and not be enrolled in Medicare.
• 7:03
  Employer contributions count towards the annual limit.
• 7:05
  She generally has until the tax filing deadline to make a contribution for this year.
• 7:10
  None of these changes the fact that it's a big year.
• 7:13
  Together, they can take the edge off it.
• 7:15
  You might be thinking this is a lot of effort for one year.
• 7:19
  It is, and it is also the setup for the best tax year she's had in decades.
• 7:24
  Next year, Monica won't have those same salary and severance payments, but she still needs to count investment income, any deferred compensation, and anything else coming in before deciding how much room she has for a conversion.
• 7:36
  That is when the moves she held back start to make sense.
• 7:40
  A Roth conversion sized to fill the low bracket, selling appreciated investments while her capital gains rate may be 0%, funding her spending from cash and savings so her income stays where she wants it, which also matters for health insurance before 65.
• 7:55
  Work those numbers out together.
• 7:57
  A conversion can leave less room for gains at 0% and can affect marketplace premium help.
• 8:03
  So the plan has two halves.
• 8:05
  This year, don't add to the pile.
• 8:07
  Use the three moves that still work, and make sure the withholding gap is covered by January 15th.
• 8:13
  Next year, run the low income playbook on purpose.
• 8:16
  Let me pull this together.
• 8:17
  Monica stopped working in June and still had the biggest income year of her career, and the tax taken out of most of it was too low.
• 8:25
  Nothing about that was her fault.
• 8:27
  What she can do is know the number before April, make sure it's covered by January 15th, and keep every other taxable move on the far side of December 31st.
• 8:37
  If this sounds like your year, start with these three checks.
• 8:41
  One, add up everything your employer paid you this year: final pay stub, bonus, severance.
• 8:47
  Equity statement, vacation payout.
• 8:49
  That is your real income for the year.
• 8:51
  Two, compare the federal tax withheld so far with 110% of last year's total tax if you earned over$150,000 last year.
• 9:01
  Above it, set aside the difference.
• 9:03
  Below it, add withholding to anything still being paid this year, or plan an estimated payment by January 15th.
• 9:10
  Three, draw a line at December 31st.
• 9:12
  Nothing that counts as income goes on this side of it unless it has to.
• 9:16
  Conversions, withdrawals, and gains wait for January.
• 9:20
  Before the year ends, pull your last pay stub and your severance letter and add up what was withheld.
• 9:26
  That one number tells you whether April will be a surprise.
• 9:29
  If you want the full picture of what a low-income year can do for you, my free guide, The Executive Women's Retirement Tax Playbook, is linked in the show notes.
• 9:38
  The link to book an online call is there, too, if you would like to talk through your own year.
• 9:43
  It's a 15-minute conversation, and since we're fee-only advisors, there's nothing for sale on it.
• 9:48
  If you know a woman who left her job this year, send her this episode before December.
• 9:53
  I'm Hazel Seco.
• 9:54
  Talk to you next time.