What Is Severance Pay
According to the prevalent IRS tax laws the situation is that even when a person is fired from a job, the amount of money he or she receives as a severance pay is taxable. Though this is due to the fact that any income is taxable, the fact is that most people consider it incorrect to tax a person who has lost his or her job.
With the recent amendments to IRS tax laws, some severance benefits may not be taxed in the near future as they do not constitute wages or salary. This position has been reached after the bankruptcy and closure of Quality Stores. In this case, the money that was received by employees who had to be terminated due to closure of the chain was not considered as wages and was not taxable. This is not a rule that will be followed in each and every situation but it certainly has opened the doors for future changes.
Is Unemployment Taxable: Should there be a tax on Severance Pay?
This is more of a moral question than a legal one as IRS tax laws are usually there to help people and get the correct taxes from them. Over the years, IRS has tried to be reasonable to all and has even forced people who avoid paying taxes to pay the right amount. However, this organization tries its best to be impartial and as such if there are more cases like that of Quality Stores, chances are that severance pay would not be taxed in the future.
The bottom line is that it does not seem to be correct to tax a person who has just lost a job. However, the situation varies from person to person as someone who immediately gets a job at a much higher salary should be liable to pay taxes. This is hence a very debatable situation and the final choice should depend on individual situations. However, it is not possible to make IRS tax laws to cover numerous situations. Hence, as a thumb rule, I believe that any income that is a result of severance from a job should not be taxable.