Buyouts are taxable


Q. My husband received a letter from Social Security regarding the incentives he received as part of his early out from the USPS. When he signed up for Social Security, he showed the clerk the paperwork he received that stated the money was for the early out and would be paid in two installments. He also had paperwork that showed one month of actual salary as well as payment he would receive for his sick leave and vacation time. Now they are saying it is all income based solely on the W-2 form. They will not accept a copy of his paystub, which shows what he actually earned and what sick and vacation time he had left. The retirement incentive was on a separate paystub and clearly states it was the incentive. They state that his Social Security will be reduced temporarily by $528 per month and that he has to repay $2,700.

We know Social Security is based on earnings from wages and nothing else, but it looks like the USPS payroll office did not differentiate between what was earned income (his normal salary) and what was considered retirement incentive. We need to find someone who can explain why the retirement incentives were not listed separately on the W-2 form. Can you help?

A. While buyouts are an incentive to retire, they are also an item of gross income and, as such, are fully taxable under IRS law. Section 451(a) of the Internal Revenue Code states that the amount of any item of gross income has to be included in the gross income for the year in which it is received by the tax payer.


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Reg Jones was head of retirement and insurance policy at the Office of Personnel Management. Email your retirement-related questions to

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