Dear Clients and Friends:

Although taxes probably are the last thing on the mind of an employee who has just been notified of a downsizing which affects him, the tax aspects of his changed personal and professional circumstances need to be addressed. Depending on the situation, the tax aspects can be quite complex, and require a person to make decisions that can affect his or her tax picture this year and for years to come. Here are just a few of the factors to consider.

1. Although severance pay is taxable and is subject to federal income tax withholding, some elements of a severance package may be specially treated. For example:

• If you sell stock acquired by way of an Incentive Stock Option (ISO), part or all of your gain may be lightly taxed long-term capital gain, depending on whether you meet a special dual holding period.

• If you received or will receive what is commonly referred to as a golden parachute payment, you may be subject to an excise tax equal to 20% of the portion of the payment, which is treated as an "excess parachute payment" under extremely complex rules.

• The value of job placement assistance you receive from your former employer usually is tax- free. However, the assistance is taxable if you had a choice between receiving cash or accepting outplacement help.

2. You should also be aware that under the so-called COBRA rules, most employers that offer group health coverage must provide continuation coverage to most terminated employees and their families. The cost of any premium you pay for insurance that covers medical care is a medical expense and, as a general rule, results in a tax benefit only if your total medical expenses exceed 7-1/2% of your adjusted gross income. However, if you have self-employment income following termination of employment, part of the cost of your medical insurance premiums may be deductible "above the line"--that is, deductible in arriving at adjusted gross income. And, if your ex-employer pays for some of your medical coverage for a period of time following termination, you will not be taxed on the value of this benefit.

3. Employees who terminate employment also need tax planning help to determine the best course of action for amounts they've accumulated in their ex-employer-sponsored retirement plans. For most, a tax-free rollover to an IRA is the best move, if the terms of the plan allow a pre-retirement pay-out. However, depending on factors such as your plan account balance and age, it may be possible for you to take a lump-sum distribution that's favorably taxed under the income averaging rules. If you are under age 59-1/2, and must make withdrawals from your company plan or IRA to supplement your current income, there may be an additional 10% penalty tax to pay, unless you're positioned to qualify under one of several escape hatches.

Please call 315-363-3338 if you wish to discuss this area further or have questions about related topics.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner