$250K Severance: Split Over Two Years to Save ~$11K Tax

Dana is a 41-year-old single filer in Atlanta, Georgia. Her employer just handed her a separation agreement with a $250,000 severance and a question buried in the fine print: take it all in a single 2026 payment, or split it across 2026 and 2027? She has no other large income for the year. Take the lump sum and roughly $53,000 of that money is taxed at 32–35%. Split it into $130,000 now and $120,000 next January, and almost none of it climbs past the 24% bracket. The difference is about $7,000–$11,000 in federal tax — for the cost of one sentence in the agreement.

This page works through the exact bracket math, the 60/40-versus-even-split question, the constructive-receipt rule that decides whether you are even allowed to do this, and the state-tax and unemployment wrinkles that change the answer.

The core idea: bracket arbitrage on a one-time income spike

US income tax is marginal. The dollars you earn fall into successive brackets, and only the dollars inside each bracket are taxed at that bracket’s rate. A one-time severance is dangerous precisely because it stacks on top of whatever else you earned that year and shoves your top dollars into the highest brackets you will hit all decade.

Here are the 2026 federal brackets for a single filer that matter for a $250,000 package (IRC §1; IRS Rev. Proc. 2025-32):

The decision lever is the top of the 24% bracket: $197,300 of taxable income. Every dollar of severance you can keep below that line is taxed at 24% instead of 32% or 35% — an 8-to-11-cent saving on every dollar you move. The whole strategy is built on dragging your top dollars back under that line.

Worked example: $250K all in 2026 vs $130K / $120K split

Assume Dana has the severance and nothing else of consequence in either year. The 2026 standard deduction for a single filer is $15,750, so her taxable income is the severance minus that deduction. We’ll ignore state tax for the moment and add Georgia back later.

Scenario A — the full $250,000 in 2026

Gross $250,000 − $15,750 standard deduction = $234,250 taxable. That income climbs all the way through the brackets and lands deep in 32% territory:

• The slice from $197,301 to $234,250 — about $36,950 — is taxed at 32%.
• Federal tax on $234,250 (single, 2026) works out to roughly $50,800.

Scenario B — $130,000 in 2026, $120,000 in 2027

Each year stands almost entirely inside the 24% bracket. Using the 2026 brackets and standard deduction for both years (2027 figures will inflation-adjust slightly in your favor):

• 2026: $130,000 − $15,750 = $114,250 taxable. Top dollars sit in the 24% bracket. Federal tax ≈ $20,900.
• 2027: $120,000 − $15,750 = $104,250 taxable. Top dollars just enter 24%. Federal tax ≈ $18,500.
• Two-year total: roughly $39,400.

The bottom line

The exact figure moves a few thousand dollars depending on your other income and the 2027 inflation adjustment, but the direction is reliable: a clean split saves a single filer with a $250,000 package somewhere in the $7,000–$11,000 range. That is real money for one negotiated sentence.

Why an even split usually beats 60/40

People instinctively reach for a 60/40 split — $150,000 this year, $100,000 next. It still helps, but it is not optimal. The goal is to keep each year’s taxable income as close to the top of the 24% bracket ($197,300) as possible without spilling over, while using up the lower brackets in both years.

• 60/40 ($150K / $100K): the $150K year has $134,250 taxable — fine, all in 24%. But the $100K year “wastes” some of the 22% and 24% room, and you gained nothing by front-loading.
• 50/50-ish ($130K / $120K): both years use up the 10%, 12%, and 22% brackets fully and only nip into 24%. Nothing reaches 32%. This is the cleanest outcome when you have no other income.

The exception: if you expect materially different income in the two years — a new job starting mid-2027, a spouse’s raise, a business that turns profitable — you weight the severance toward the lower-income year. If 2027 will already have a $90,000 salary, you flip to something like a 70/30 split so the severance doesn’t stack on top of that salary and re-create the 32% problem.

The rule that decides whether you can do this at all: constructive receipt

This is where most DIY plans fall apart. You cannot take the full $250,000 in December, then decide in April to “count” half of it as next year’s income. Under the constructive receipt doctrine (IRC §451; Treas. Reg. §1.451-2), income is taxed in the year it is “credited to your account, set apart for you, or otherwise made available so that you may draw on it.”

Translated: the moment your employer cuts the check or makes the money unconditionally available, the IRS treats you as having received it — whether or not you deposit it. Stuffing the check in a drawer until January does nothing.

The fix is to arrange the split before you have a right to the money. The separation agreement — signed at termination, before any payment is due — must fix the payment dates across two tax years and must not give you the power to accelerate the second payment. When you cannot demand the money early, you are taxed on each installment in the year it is actually payable. Three structures satisfy this:

1. Salary continuation: the employer keeps you on payroll and pays the severance over a schedule that straddles December 31. Each paycheck is taxed in the year received.
2. Fixed installment lump sums: e.g. $130,000 payable within 30 days of separation in late 2026 and $120,000 payable on January 15, 2027, written into the agreement with no early-payment option.
3. A short-term deferral within the 409A window: more complex, and most employers avoid it. Salary continuation or fixed installments cover almost every real-world case.

The withholding trap people miss

Severance is a “supplemental wage,” and your employer will withhold federal tax on it at a flat 22% if the payment is $1,000,000 or less for the year (37% on any portion above $1M) under IRS Pub. 15 and IRC §3402. That 22% withholding is not your actual tax.

On the $130,000 installment, 22% withholding ($28,600) is close to the real liability, so you’re roughly square. But if you ever do take the full $250,000 in one year and land in 32% territory, 22% withholding leaves you under-withheld by $15,000 or more — a balance due in April plus a possible underpayment penalty (IRC §6654). Whichever path you choose, make a Q4 estimated payment to cover any gap. Splitting the severance also shrinks this gap, because keeping your top rate at 24% pulls your actual liability much closer to the 22% that was withheld.

State tax: the split can save you twice

Most states tax ordinary income (and severance is ordinary income) on their own brackets, and many tax it as flat or graduated income with no preferential rate. The two-year split helps at the state level too, though the magnitude depends on where you live.

• Georgia (Dana’s state): a flat 5.39% on taxable income in 2026 (HB 1437 flat-tax schedule, dor.georgia.gov). Because the rate is flat, splitting does not change Georgia tax — she owes about $13,500 in state tax either way. Her ~$11,000 saving is purely federal.
• Graduated-rate states (CA, NY, NJ, etc.): the split saves at the state level too, because you avoid stacking the top dollars into the state’s highest brackets — California’s top rate is 13.3% and New York’s is 10.9%.
• No-income-tax states (FL, TX, WA, NV, and 5 others): no state benefit because there’s no state tax — but the federal saving still stands in full.

If you can also change your state of residence between the two payment years — say you relocate from California to Texas before the 2027 installment — the second tranche may escape state tax entirely. That requires a genuine change of domicile, not a paper move, and high-tax states audit departing residents aggressively.

What most people miss: the unemployment trade-off

The bracket math is only half the decision. Salary continuation — the most common two-year vehicle — can delay or eliminate your unemployment benefits, because most states treat continued salary as wages for the weeks it covers. A fixed installment lump sum is treated differently state by state. This is the variable that quietly flips the answer:

• New York disqualifies you from UI for any week in which allocated dismissal pay exceeds the maximum weekly benefit rate ($869/week in 2026) — but under NY Labor Law §591(6), if the first severance payment lands more than 30 days after your last day, severance doesn’t reduce UI at all.
• New Jersey does not reduce ordinary UI for lump-sum severance (N.J.S.A. 43:21-5a), so a lump-sum split there preserves a $875/week benefit while you spread the income.
• Georgia treats severance and wages-in-lieu-of-notice as disqualifying wages allocated week-for-week (O.C.G.A. §34-8-195), so salary continuation there suppresses the ~$365/week max benefit during the continuation period.

The interaction matters: a lump-sum installment split may both lower your tax and preserve unemployment benefits, while salary continuation lowers your tax but can cost you weeks of UI. Run both numbers — bracket saving plus UI value — before you pick the vehicle.

When splitting does NOT pay off

• Your other income already fills the brackets. If you have a $300,000 base salary, the severance is taxed at 35% no matter which year it lands — spreading buys nothing. (That’s the executive case in the linked $250K-at-35% piece.)
• You expect tax rates or your income to rise sharply. Deferring income into a year when you’ll earn more, or into a year of higher statutory rates, can backfire.
• You need the cash now. A deferred installment is only valuable if you can afford to wait for it. Job-search runway and emergency reserves come first; a few thousand in tax saving doesn’t justify a liquidity crunch.
• The employer won’t paper it correctly. If they insist on one lump sum with no enforceable second-year date, constructive receipt taxes it all in year one regardless of when you deposit it.

Key takeaways

• Splitting a $250,000 severance from one year into a roughly even $130K / $120K two-year split saves a single filer with no other major income about $7,000–$11,000 in federal tax by keeping the top dollars in the 24% bracket (taxable income to $197,300 in 2026) instead of 32–35%.
• An even split usually beats 60/40 when your other income is similar across both years; weight the severance toward the lower-income year if you expect a salary or business to ramp up in year two.
• Constructive receipt (IRC §451) is the gate. The two-year split must be fixed in the separation agreement before you have a right to the money — you cannot retroactively defer half after the check is available.
• Watch the flat 22% supplemental withholding (IRS Pub. 15): it under-withholds badly in 32–35% territory, so make a Q4 estimated payment to avoid an underpayment penalty under IRC §6654.
• The decision lever isn’t just the bracket — it’s pairing the right vehicle (lump-sum installment vs salary continuation) with your state’s unemployment-offset rules so you don’t trade a tax saving for lost UI weeks.