Advanced Underwriting Consultants

Question of the Day – October 2

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  I have a 55 year old customer who is no longer employed but who is collecting severance pay.  Is the client eligible to make an IRA contribution?

Answer:  Yes, probably.  Severance pay is considered to be earned income for the purpose of eligibility to make an IRA contribution.

Here’s an excerpt from Publication 590:

Wages, salaries, etc.   Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2…

There are some inconsistent court cases on the issue of whether severance pay is in the nature of wages subject to FICA.  The IRS has consistently held the position that severance is just like any other earned wage for FICA purposes.  It’s hard to believe that the IRS would take a contrary position for IRA contribution purposes.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.