It’s my annual “Taxes from A to Z” series! For the series, I’ll focus on terms that you might see on your tax forms and statements but not necessarily in the headlines. If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, this is one series you won’t want to miss.
O is for Outplacement Services.
In a sluggish economy, jobs are tough to come by. To help ease the transition for some soon-to-be former employees, some businesses provide outplacement services as part of a severance or exit package. Those services might include help writing a resumé, career counseling, or interview tips.
As the employee, accepting those services can mean good things for your future career prospects. However, accepting those services can have income tax consequences.
If you choose to accept services in return for a reduced amount of severance pay, you must include the entire amount of the severance pay (before the reduction) as income on your tax return. The good news, however, is that you can deduct the value of the services (generally, the reduced amount) as a miscellaneous deduction – assuming you itemize – subject to the 2% floor. Miscellaneous deductions are only allowed to the extent they exceed 2% of your adjusted gross income (“AGI”), similar to the way that you figure the deductions for medical expenses. The threshold for the deductions is often referred to as a “floor.”
Here’s a quick example. Assume your miscellaneous deductions, including the value of outplacement services, total $5,000 and your AGI is $50,000. You can properly deduct $4,000, or $5,000 (total miscellaneous expenses) less $1,000 “floor” ($50,000 x 2%) = $4,000.
If outplacement services are not offered in lieu of any severance payment and are either de minimis (meaning of little value) or considered a working condition fringe benefit, the value of the services is not reportable as income. In that case, the services must be provided on the basis of need and your employer must derive a “substantial business benefit” from offering the services (examples include promoting a positive business image and maintaining employee morale). Keep in mind, though, that if you had the option to receive cash or another taxable benefit instead of outplacement services, the services would still be taxable.
Your HR person or tax professional should be able to help you sort all of this out ahead of time. If you have questions, be sure to ask before opting into (or out of) outplacement service opportunities.
For more Taxes A to Z, check out:
- A is for Advance Payment of Premium Tax Credit.
- B is for Backup Withholding.
- C is for Campaign Contributions.
- D is for Discount.
- E is for Effective Tax Rate.
- F is for Filing Status.
- G is for Guide Dog or Other Service Animal.
- H is for Higher Standard Deduction.
- I is for Inheritance.
- J is for Joint Return.
- K is for Key Employee.
- L is for Limits on Deductions.
- M is for Marriage Bonus & Marriage Penalty.
- N is for Nominee.
