Here’s How You Can Minimize Tax Cuts on Your Hard-Earned Bonus
Data compiled by CNN shows that about 91% of enterprises give their employees flexible compensation packages. For some, the salary is closely linked to their takeaway at the end of the day as either commissions or bonuses.
In most situations, bonuses are usually granted to exceptionally performing workers at the end of the year, usually around the holidays. Since we’re just at the start of the year, this means that either your check is sitting pretty in the bank, or, you’ve already started mulling about what to do with your well-earned reward money.
Understandably, it would be okay for your splurge on the latest fancy toy, iPhone, or car. Even a vacation doesn’t sound so bad. However, carelessly spending your funds is not the best way to appreciate bonuses.
Instead, you should spend more time conceiving goals for the long-term while investing some monie into retirement, health, and emergency funds. If you’ve ticked off the box on all these things, then, you can choose to invest in your own wellbeing, it definitely pays off in the end.
According to Katie Brewer, who dabbles as the CFP at Your Richest Life, an established financial planning company, you need to stash about eighty percent of your bonuses into serious projects. With the remaining twenty percent, you can engage in fun activities to your amusement.
Through it all, don’t forget that taxes need to be paid. While bonuses are essentially tips issued by employers for a job well done, they are not exempted from the tax laws.
As per the IRS, bonuses lie in the bracket of “supplemental income”. In effect, this means that bonuses can be withheld in a different fashion than normal salaries.
There are a couple of employees who choose to use the aggregate method when doing the math on bonuses. In this method, bonuses are wholly added to normal paychecks. Then, the combined figure is withheld as the typical income rate. In essence, the new figure represents what you make every month. Which means that the total could be lower or higher than the stipulated 22%.
If you’re unsure about how to go about filing your tax returns, a quick conversation with a tax professional will help you gain some comprehension on the topic.
As opined by a member of the American Institute of CPA’s Personal Financial Specialist Credential Committee (AICPFSCC), one Robert Westley, bonuses offer some degree of flexibility as to when they trickle into accounts.
He further shared that at times, it may be more logical to receive bonus payments in January instead of December. Why? Because doing will lead to you having reduced tax obligations for the past year, 2018. Alternatively, Westley suggested that you have the power of spreading out your bonus into numerous pay phases.
In conclusion, Westley added that working closely with a tax analyst is the best way for individuals to project how much they’ll be owed going into the new year, 2019.
Working closely with an accountant, you can effectively arrive at a solution on how to do minimize the impact your bonus has on your tax report.
If you happen to have a donor-advised fund, then, it’s high time to chip in with a little something. Ideally, donor-adviced funds are comprised of tax-favorable accounts through which you can steer traffic towards your best charities.
Speaking to reporters, Carolyn Mazzenga, a manager at Marcum LLP, charitable contributions offer some leeway for employees to positively contribute to society whenever a bonus is right about to pop in. Mazzenga stressed that the end figure is still deductible, however, you may need to itemize some of the missing elements in your tax filing, before you lay claim to charitable contributions made
In order to get the most out of a windfall, you need to clear personal or business related expenses before December 31st. Whether it’s trivial or major, just make sure you sort it out before the start of the new year. A couple of ideas to get you started includes buying computer machines, sorting phone, and other office bills.
If your employer offers a health savings account, you can defer some funds and pay the contribution limit. As you do so, you’re going to need to be certain the monies stashed away can comfortably carry you into the new year
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