Wednesday, January 15, 2014

Most Tax Efficient Way to Receive Bonus?

Over at Bogleheads we read: 

Most Tax Efficient Way to Receive 

Bonus?by ccm241 » Tue Jan 

14, 2014 7:19 pm

Hello Bogleheads,

Need some advice if someone would be so kind as to lend it. Normally I would be asking my CPA questions like these, but I am actually looking for a new CPA at the moment and the deadline on this thing is quick approaching...

My bonus is paid at end of January for the previous year. My understanding is that bonus money is always withheld at a higher (maximum) rate (I think maybe 40%?) which means I'm basically loaning that money interest free to Uncle Sam for a year. This year was a pretty good year on the sales front so I was able to max out my bonus incentive and because the amount is considerably higher than its been in years past, I am thinking about how to handle more than in the past.

FYI, my current filing status is married filing jointly (we also had our first child in June of 2013). Federal income tax bracket for 2013 will be 28%.

In terms of our financial situation, we are currently paying down wife's car and have no other debt. Emergency fund of 6 months in a money market account is also place. Primary goal of bonus money is to go towards house fund. We hope to purchase in summer of 2014. Although we wont really need the money until 2014 anyway, I'd love to have it earning interest in my accounts rather than Uncle Sam's. Do I have any options here?

Posts: 6
Joined: 5 Jun 2013

Re: Most Tax Efficient Way to Receive Bonus?by freebeer » Tue 

Jan 14, 2014 7:23 pm

Your employer can choose from two methods (assuming < $1M bonus). Calculator: ... alculator/
Posts: 987
Joined: 2 May 2007

Re: Most Tax Efficient Way to Receive Bonus?by G-Money » Tue 

Jan 14, 2014 7:25 pm

I think the withholding rate is typically 25% using the percentage method: ... y-the-irs/

And, if you're concerned about overwithholding, you can always use the IRS withholding calculator to determine if you should make an adjustment to your W-4: ... Calculator

Re: Most Tax Efficient Way to Receive Bonus?by livesoft » Tue 

Jan 14, 2014 7:25 pm

The first day of work in January, I adjust my withholding so that my Federal income tax withheld is about $20 a paycheck. Another thing is to set 401(k) contributions to the maximum possible. Our 401(k) contributions are taken out of bonus amounts as well since the bonus is just added to a regular paycheck and is not a separate check.

If I used the IRS W-4 calculator, I would always be way over-withheld, so I based withholding on my real tax obligations.
Last edited by livesoft on Tue Jan 14, 2014 7:35 pm, edited 2 times in total.
It's all about market timing, uh, I mean rebalancing, uh, I mean 
opportunistic rebalancing, uh, I mean short-term opportunistic rebalancing 
due to a short-term change in one's asset allocation.

Re: Most Tax Efficient Way to Receive Bonus?by Dutch » Tue Jan 

14, 2014 8:47 pm

If the employer would structure the bonus in the form of a 401k employer contribution, that would be very tax efficient.

Just brainstorming here, I'm not sure if that is possible.
Posts: 272
Joined: 27 Jun 2013

Re: Most Tax Efficient Way to Receive Bonus?by ccm241 » Tue 

Jan 14, 2014 9:16 pm

freebeer wrote:Your employer can choose from two methods (assuming < $1M bonus). Calculator: ... alculator/

I work for a relatively small company that is German based (payroll is processed in Germany) and I have open lines of communication with the lady that does payroll. Is requesting that they use the percentage method (rather than the aggregate one) to withhold on the bonus a normal type of request, ie, is this a relatively normal thing to ask of my employer?

According to that calculator it looks like it will make a significant difference so I am definitely interested in pursuing this.

Thanks for all the replies - you guys rock!

How Bonuses are Taxed Calculator (Click Here)


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