Annual Leave Payout Taxed at 40%

Free Copy of My Book: Building Wealth In the TSP: Your Road Map To Financial Freedom as A Federal Employee:
app.hawsfedera...
FREE WEBINAR: "The 7 Biggest FERS Retirement Mistakes":
app.hawsfedera...
Want to schedule a consultation? Click here:
bit.ly/work_wi...
Submit a question here:
app.hawsfedera...
I am a practicing financial planner, but I'm not your financial planner. Please consult with your own tax, legal and financial advisors for personalized advice.

[@13hiker]

When I retired, I cashed out $20,000 in annual leave. After taxes and deductions, I only took home $12,000. If I knew that taxes and deductions were going to be so high, I would have used some leave during my last year instead of pushing through the year and not taking any time off.

[@runner2008]

Good to know. Thanks

[@itguru2037]

You get it bank when you file taxes next year

[@ashleyjones5396]

@@itguru2037 not if you are a high earner. We don’t know if this person has a spouse that’s a high earner as well. We also don’t know how they have their income taxes structured throughout the year.

[@itguru2037]

@@ashleyjones5396 are you a CPA? I am

[@CindyBain-w6f]

@@13hiker great point! Guy at my work took 2 or 3 months of leave and retired. Def something to try and figure out

[@ei513563854]

plan to retire at least 12 months out. take 3-4 days annual leave every pay period. Reduce your tax rate. use those days for fine tuning your retirement plan.

[@erickarnell]

Thanks for these short videos that just give the audience something to think about.

[@bigblue3568]

If a Federal Employee is banking on their annual leave lump sum payment to live on while waiting on pension check to hit their account then they probably should work a few more years and get their ducks in a row.

[@itguru2037]

Why would anyone retire with just their annual leave payout in the bank?

[@symboan8]

You can carry over 240 hours into the year your retiring and accrue leave up to the 8 hours times 26 weeks. (240 + 208) For a total of 448 hours. You must retire before the leave expires. Check the OPM calendar for Leave Year Beginning and Ending Dates. You can use your 2027 leave until January 08, 2028. You can retire on January 7 with 448 hours of leave. If you don’t schedule your leave and your supervisor doesn’t make you take it, then they have to pay out.

[@denniswarren5871]

If they take 40% of it, why not use it (get paid for 100% of it) and take an equivalent amount out of your TSP ahead of time to cover the gap between retirement and when your retirement benefits start? That is, retire effective date of X, but actually leave service X - Y, where Y is the number of days of annual leave you have left on the books.

[@exvan3571]

IMO I'd rather use savings as use any money, such as TSP, which earns interest. You lose money on the back end.

[@zenawarrior7442]

Thank you Dallen. I love your intro & always to the point, valuable, fun presentations😊📄💰

[@karlamiller1453]

When I retired, I took terminal leave. I retired on December 31, 2021. So, I started my leave October 2021. I had enough in savings to sustain me until my pension kicked in.

[@SK-qc6fb]

Wow, eye opening, Thanks!

[@CindyBain-w6f]

Outstanding info!!

[@md-crab7379]

Claim federal and state exempt for the moment until you get your pension the change your withholding are due the next year

[@dar7771]

Not sure why anyone will take the lump sum for accrued leave. Just use it. Only lump sum should be for unused sick leave.

[@Kevin-jf5bw]

lump sum is for employees who lack critical thought=.gov.

[@stephensiler3854]

Great point on the SS cap - I've never seen that mentioned before.

[@georgiaboy8686able]

Great info but I couldn’t stop laughing every time you went back to circle/underline the 160k. Love the video brother!

[@wess5478]

You are not clear if you are talking about tax or withholding. What people will notice in their check is withholding, not tax. On your whiteboard, SS & Med is tax, the Fed & State is withholding. Because many people don't know the difference, it is important to always specify.

[@legony1]

Agreed

[@Dave-sw2dm]

He is clearly talking taxes not withholding. If you get the lump sum in the next year and plan a lower income for that year then your taxes might be less. In that case though the withholding on that lump sum will probably be higher than the tax rate for that year.

[@wess5478]

​@@Dave-sw2dmRe-listen to the first 15 seconds of his video. He says "why the government can take 40% of your lump sum payment before you even see it". That's withholding, not taxes.

[@Dave-sw2dm]

@@wess5478 , withholding is based on taxes is you chose to optimize your deductions. I always owe the Fed about $200 and get back about $400 from the state.

[@kevinclark1482]

@@wess5478 so why couldn’t you increase your fed & state tax withholding like 1 or 2 pay periods BEFORE your retire so less taxes would be taken out?

[@itguru2037]

No state tax in Florida

[@mdherald7476]

Retire December 31st, the annual leave check will be on next years income, why not make that check "tax exempt" "

[@jhartmac100]

exactly

[@celticmco5672]

It's not "taxed" at 40 percent that is withholding; and it is lower in states with no income tax. Just take the max AL payout. Had almost 33 years in and never knew anyone who didn't.

[@JuanMartinez-kn2qs]

Thank you. Useful information

[@williamvann5339]

Great info. I am retiring in Dec of this year and hope to benefit with it being on my 2025 taxes. 😊

[@loslaynes]

I'm thinking that I will take 208 hours at the end of the year (November/)December and 240 hours at the beginning (January/Febuary) then retire. I'll be getting Social Security and my military pension so my taxes should be sane and not insane.

[@falcon618111]

In this example if you make 150k/yr there is a very high chance you will have hit the FICA (SS tax) and the 6.2% wont apply to your annual leave lunp sum.

[@itguru2037]

Correct in this case or example I won’t pay state tax or ss because I make 191k. I’ll be taxed 25 or 20 percent on my AL payout

[@williamhudson4794]

Matters not. Taxes will work itself out when you file with the IRS.

[@jhartmac100]

oh does it lol how?? they take it all

[@cindyc8888]

Long question short, would you recommend retiring in the beginning of the year when retirement income is sure to result in a lower annual income as opposed to end of year when one will have the bulk of higher income behind them for that particular year?

[@PlanYourFederalBenefits]

Great question, there's really no perfect answer for everyone. If it works better for you, then that's great.

[@jt2quick]

Alrighty then. Thanks for breaking that down. In the end, no matter what. Because after all is said and done.... in the end someone will sell their annual leave or use it. Keep pumping out those videos.

[@Hbd2002]

Just take all your leave instead of taking a payout

[@scottgold1054]

I took the money all get half back next year lmao.

[@khalilkodsi8701]

they took 38% in taxes from my two years worth of annual leave when I retired this past dec. 30 ... Ugh!

[@66pacesetter]

I'm retiring at the end of August USPS. Very minimal OT this year to retiring. So I'm looking at 20,000 less gross pay for the year. Hopefully that will help in getting my Annual payout.

[@parler8698]

Change your withholding.

[@itguru2037]

Correct

[@RiseSparkleJoy]

Do you know if we can exempt from the fed and state withholding? Or is the annual leave payout taxed like an award?

[@itguru2037]

@@RiseSparkleJoy can’t. It’s taxed the same

[@RiseSparkleJoy]

@@itguru2037 booooo! Thx!

[@LittleCabin]

So, even if you don't receive it until the following tax year, it's still going to be taxed up front...you might get some of that back when you file the next year (if lower tax bracket), but you'll still have it taxed at whatever tax rate you were in before you receive the check. Am I missing something?

[@fessit]

What about retiring at the end of the pay year?

[@jhartmac100]

Change your exemptions that easy

[@mikebarnes2294]

Even if you only face a 22% federal tax rate and a more average 5% state income tax your total tax rate would be just under 35% with Social Security and Medicare taxes.

[@javiersmith2216]

My AL payout may push me into a different tax bracket for cap gains if i receive it the yr after i retire. I was planning on leaving 31 dec. My birthday is 20 dec. The best plan i have is use it or donate it.

[@SK-qc6fb]

So if you max out SS, then retire at the end of the year, maybe Nov 30??

[@gregorylocal]

It’s a higher withholding rate due to it being considered supplemental income, not a tax. There is no 40% tax rate at the federal level. You’d need 570k+ taxable income (not gross or agi) to see the top 37%. I understand most look at the withholding and immediately think tax but it isn’t.

[@erickarnell]

The 40% comes from adding the example federal, state, SS, and Medicare taxes.

[@josephgraham1065]

does this lump sum also include locality pay and cola?

[@itguru2037]

Yep

[@mikebarnes2294]

2024 Social Security Maximum Taxable Earnings are $168,600.

[@RiseSparkleJoy]

OMG I asked for this video! Thank you! I was wondering if the annual leave would be taxed with our regular pay and if we could exempt the fed tax with a W4 change..???

[@PlanYourFederalBenefits]

Great question. Annual leave is treated as income, so whatever the federal government decides is your tax bracket will be what you pay. The odds of you not paying federal tax on it is very small. But, it could be possible if you have very little income.

[@markmurrell1894]

Would it better if you used the annual leave before you retired if you don’t “need” the lump sum to carry you until your pension kicks in?

[@BC-te9ow]

I would use the leftover SL hours not counting towards your time.

[@DanielPetersen288]

Mark, this is a prioritization exercise-if time off is more important than the extra money obtained from retaining your annual leave, then it makes sense to use your leave.

[@1zcott]

good one

[@PlanYourFederalBenefits]

Thank you! Cheers!

[@comptroller39]

Do you go out an speak to organizations? If so, how can I book you?

[@PlanYourFederalBenefits]

Yes, if you can send a detailed email of what you would like to this email, that would be great. [e-mail]

[@shannonhutchinson4084]

Please explore options on receiving hiring and relocation bonuses. 25k for a relocation bonus is taxed but it can be lumped sum or broken up. How should one ask to receive this money?

[@ThisFriggenGuy-li5ui]

Ask the employer

[@shannonhutchinson4084]

@@ThisFriggenGuy-li5ui they aren’t helpful.

[@ThisFriggenGuy-li5ui]

@@shannonhutchinson4084 if you already started it’s too late. If you haven’t yet. Try talking to the person who offered you the job or bonus.

[@kevind814]

If I will retire mid-year, is there any reason/benefit to changing my w-4 withholding at the beginning of that year? Seems like it might be complicated figuring out what my total end of year income will be and how much I want to be withheld.

[@PlanYourFederalBenefits]

Great question. You certainly could if it works well for you. If you would like to talk about specific details and a specific solution, feel free to schedule an appointment with us here: app.hawsfederaladvisors.com/work-with-us

[@Royale_with_Cheeze]

This may sound like a stupid question, but here goes: If you use your annual leave as you go along and don't have any left as a lump sum payout upon retiring, would the taxes and contributions to taxes, SS and Medicare be LOWER than what it will be if taking, say 440 hours in lump? If so, it would appear that just using it up and not having any excess annual is the best option.

[@PlanYourFederalBenefits]

Great question. Yes, with no lump sum on annual leave you do not pay taxes on it. But, you do miss out on the lump sum

[@Royale_with_Cheeze]

@@PlanYourFederalBenefits That means that if someone takes off two weeks vacation, a full pay period for those in the PO, their Medicare, SS, union dues, TSP and CFC (for any who contribute) are deducted but no taxes taken out? I never knew that. I find that odd. You can confirm that? Would that also apply to sick leave use? If someone took two full weeks of sick, would it be taxed or not?

[@jenzanoni9305]

Im confused, I have about 210 hours of annual leave by January 2025 how many hours transfer into 2025?

[@SpookyEng1]

240 max at most agencies

[@symboan8]

You can carry over 240 hours into the year your retiring and accrue leave up to the 8 hours times 26 weeks. (240 + 208) For a total of 448 hours. You must retire before the leave expires. Check the OPM calendar for Leave Year Beginning and Ending Dates. You can use your 2027 leave until January 08, 2028. You can retire on January 7 with 448 hours of leave.

[@Kevin-jf5bw]

Poor solutions unless terminal illness or dire need of funds. .Gov spent 1 1/2 years trying to fire me due to my vax status and still maintain some sort of record of my "noncompliance". Built up my annual leave so I carried over the max for 2024, took no vacation hours during the first half of 2024, picked the period which would cause the most disruption to my agency and currently on extended vacation prior to resignation. Continue to receive 401k employer match, accrue vacation while on vacation, catch a couple Federal Holidays and keep insurance subsidy during this period. Lump sum payments are for people who can't think outside the box=.gov employees.

[@Stosh68]

Only you believe this fantasy. None of this is true.

[@jenzanoni9305]

What is the max amount of hours you can get in a cash out?

[@SpookyEng1]

448 if you retire Dec 31 and take no leave the last year

[@robertwilliams1774]

Any amount of earned I repeat earned annual leave you save

[@PlanYourFederalBenefits]

Great question, in this video is a great explanation to that question: kzbin.info/www/bejne/a4GkiJWNiraeobc&pp=ygUqaGF3cyBmZWRlcmFsIGFkdmlzcm9zIGJlc3QgZGF0ZXMgdG8gcmV0aXJl