Author Topic: Question about Bonuses and Taxes  (Read 4081 times)

Bikesy

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Question about Bonuses and Taxes
« on: August 30, 2015, 08:30:50 AM »
Don't worry this isn't your normal question about bonuses being taxed differently than regular income!

Here's my situation:  My estimated tax burden for 2015 is $2400 (not too bad on income of around $115k!)  My current federal withholding for the year is already nearing $3,000.  Essentially I've already paid all my taxes for the year, even if I took my withholding to $0.  Here's my issue, I adjusted my w4 so my federal withholding every paycheck is $0 but I'm receiving a bonus once per month that isn't affected by w4 selections...25% is automatically withheld.  This will put my estimated tax refund at close to $2500 for 2015.  Do I have any options or do I just accept the situation and accept that I'll have a tax return?  I was wondering if I'm legally allowed to choose exempt on my w4 for the rest of the year even though I don't meet the stated criteria for an exempt claim.

I'm also a bit concerned because 2016 and forward will have me receiving upwards of 40% of my income in the form of bonuses and RSUs.  Even with 0% withholding on every paycheck, these bonuses will result in a large return.

Thanks for the help!
« Last Edit: August 30, 2015, 08:39:24 AM by Bikesy »

MidWestLove

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Re: Question about Bonuses and Taxes
« Reply #1 on: August 30, 2015, 09:00:22 AM »
while I do not have an answer to your questions, I am curious on how you managed to reduce tax liability that much? multiple retirement options (i.e. 403 + 457)? Our tax liability was more than 25 times your number...

forummm

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Re: Question about Bonuses and Taxes
« Reply #2 on: August 30, 2015, 09:41:06 AM »
Is it a problem to have a large return? I guess it would be nice to invest that money each time you got paid. But you could just look at the tax return money as going right to your IRAs for the year.

while I do not have an answer to your questions, I am curious on how you managed to reduce tax liability that much? multiple retirement options (i.e. 403 + 457)? Our tax liability was more than 25 times your number...

Children? Rental properties?

Rezdent

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Re: Question about Bonuses and Taxes
« Reply #3 on: August 30, 2015, 09:55:27 AM »
At my employer, they withheld tax at the 35% rates for bonuses, and this was not negotiable at all.

I'm not understanding why you would want to claim exempt, since you are alr3ady at zero plus it wouldn't affect the bonus anyway?

MDM

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Re: Question about Bonuses and Taxes
« Reply #4 on: August 30, 2015, 10:53:06 AM »
Do I have any options or do I just accept the situation and accept that I'll have a tax return?  I was wondering if I'm legally allowed to choose exempt on my w4 for the rest of the year even though I don't meet the stated criteria for an exempt claim.
You can't choose "exempt from withholding" per the W-4 language, but there is nothing preventing you from claiming 50 (or whatever number you need) exemptions to reduce your normal withholding to zero.

If you are getting paid both normal and supplemental wages, there is nothing you can do if your employer chooses to withhold at a flat rate on the supplemental wages.  You can request that your employer use the alternate method (see links below), but it is the employer's choice in that situation.

See http://forum.mrmoneymustache.com/ask-a-mustachian/max-out-401k-using-a-variable-annual-bonus-contribution/msg521434/#msg521434 and particularly http://www.irs.gov/publications/p15/ar02.html#en_US_2015_publink1000202352 for more details.

Bikesy

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Re: Question about Bonuses and Taxes
« Reply #5 on: August 30, 2015, 12:33:57 PM »
while I do not have an answer to your questions, I am curious on how you managed to reduce tax liability that much? multiple retirement options (i.e. 403 + 457)? Our tax liability was more than 25 times your number...

My 401k
Wife's solo 401k
Pre tax health/vision/dental
HSA
2 IRAs
2 Standard Ded.
3 exemptions
1 child credit

I make around 100k wife makes around 15k as an LLC.  We put all her profits into her 401k.  Pretty sure I did the math right.  If I had some taxable losses to harvest I'd be even lower!

Thanks for the help everyone...seeing as I work for a mega corp they are unlikely to change the way bonuses are taxed.  I guess this is a mustachian people problem!


MDM

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Re: Question about Bonuses and Taxes
« Reply #6 on: August 30, 2015, 12:59:19 PM »
My 401k
Wife's solo 401k
Pre tax health/vision/dental
HSA
2 IRAs
2 Standard Ded.
3 exemptions
1 child credit

I make around 100k wife makes around 15k as an LLC.  We put all her profits into her 401k.  Pretty sure I did the math right.  If I had some taxable losses to harvest I'd be even lower!
For those skeptical of OP's taxes, below is one plausible scenario.  Yes, if one of them makes only $15K then deducting $18K for a 401k is inaccurate but close enough....

CategoryMonthly
Comments
Annual
Salary/Wages$9,583$115,000
Pretax Health Ins.$364$4,368
Pretax Vision/Dental Ins.$75$900
HSA$554$6,650
FICA base salary/wages$8,590$103,082
Traditional IRA$917At maximum$11,000
401(k) / 403(b) / TSP / etc.$3,000At maximum$36,000
Income subject to IRS tax$4,674$56,082
Federal tax$2002015 rates, MFJ, stand. ded., 3 exempt.$2,400


Filing Status21=S, 2=MFJ
# of earners2
# Exempt.3
# Children <17$1
Total Income$56,082
Std. Deduct.$12,600
Act. Deduct.$12,600
Exemption$12,000
AGI$56,082
MAGI$67,082
Taxable$31,482
Tax$3,800
Savers' credit$400
Tax after n-r credit$3,400
Child Tax Cred.$1,000
EIC$0
Net Tax$2,400

MidWestLove

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Re: Question about Bonuses and Taxes
« Reply #7 on: August 31, 2015, 06:40:52 AM »
Thank you both. good reminder of how 'progressive' (as in escalating, not as actual progress) our tax code is. We had a very good year in 2014 (stocks matured) and are grateful with ~300 AGI, the part that I was trying to figure out is how with the salary less than twice yours (maxing out 401k, 403b, HSAs, tIRAs) we still end up paying 74k in taxes... Another incentive to cut on work , either partially or altogether..

COlady

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Re: Question about Bonuses and Taxes
« Reply #8 on: August 31, 2015, 09:59:46 AM »
You can't take a deduction for contributions to your traditional IRA if you have a 401k.  You can still make the contribution and it will grow tax free. However, at your income level (assuming 115k is married filing jointly), you should contribute to a Roth since you can't take the deduction on a traditional anyway.....

seattlecyclone

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Re: Question about Bonuses and Taxes
« Reply #9 on: August 31, 2015, 10:48:36 AM »
You can't take a deduction for contributions to your traditional IRA if you have a 401k.  You can still make the contribution and it will grow tax free. However, at your income level (assuming 115k is married filing jointly), you should contribute to a Roth since you can't take the deduction on a traditional anyway.....

The income phaseout for married filing jointly begins at $98k MAGI. Given that the OP and wife are contributing as much as possible to their respective 401(k) plans (which happens pre-MAGI), it seems very likely that they do indeed qualify to deduct traditional IRA contributions.

Mississippi Mudstache

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Re: Question about Bonuses and Taxes
« Reply #10 on: August 31, 2015, 10:50:37 AM »
You can't take a deduction for contributions to your traditional IRA if you have a 401k.  You can still make the contribution and it will grow tax free. However, at your income level (assuming 115k is married filing jointly), you should contribute to a Roth since you can't take the deduction on a traditional anyway.....

Um, this is completely wrong. The traditional IRA phaseout is based on MAGI, not gross income. OP should have no trouble at all getting MAGI under the $98,000 cutoff.

Edit: Unsurprisingly, seattlecyclone beat me to it.

MDM

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Re: Question about Bonuses and Taxes
« Reply #11 on: August 31, 2015, 10:56:58 AM »
...and just to pile on...:
You can't take a deduction for contributions to your traditional IRA if you have a 401k.
That is not correct.  There are some differences in the income limits, but one may certainly have both a 401k and a deductible IRA.

Quote
You can still make the contribution and it will grow tax free. However, at your income level (assuming 115k is married filing jointly), you should contribute to a Roth since you can't take the deduction on a traditional anyway.....
In this case, it is the deductions from the 401k that allow the IRA to be deductible, because IRA deductibility is based on Modified Adjusted Gross Income (MAGI).  The MAGI in the example given is $67,082, well within the http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits.

COlady

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Re: Question about Bonuses and Taxes
« Reply #12 on: September 01, 2015, 11:02:34 AM »
You guys are absolutely right! I should have checked before I posted!