Article Bookmarked
Bookmark Removed

Use Your Bonus Wisely to Catch a Tax Break


Jun. 17, 2015 Betterment

Bonuses are tricky. Part windfall, part tax event, part savings opportunity—you need to juggle multiple aims and concerns to maximize your yearly (or quarterly) perk.

Tax time is coming, so keep reading as it’s still possible to contribute to a traditional or Roth IRA for 2013—yes, even if you also participate in your company’s 401k. Betterment’s efficient IRA set-up can help you get there quickly and securely, so you get the added tax break.

Bonuses are considered “supplemental income” by the IRS, which means they could be withheld on differently than your regular salary. Bear in mind that Betterment is not a tax advisor, nor should this article be considered tax advice. Please consult your tax professional if you need tax advice.

The IRS suggests a flat withholding of 25% from bonuses, and many employers follow that method. (Remember that withholdings are meant to be an estimate of how much you’ll owe at the end of the year, not the actual tax itself.) But some employers use the aggregate method, in which your whole bonus is added to your regular paycheck, and the combined amount is withheld at the normal income rate, as though that amount is representative of what you make every paycheck, which could be higher (or lower) than 25%.

Some people believe that bonuses are taxed at a higher rate than ordinary wages, but that’s not the case. The aggregate method of withholding can result in bumping you into a higher estimated tax bracket, which creates the illusion that you “keep less of it,” but no special tax rates apply just because a payment from your employer is characterized as a bonus. So a bonus is like a raise, but when your income goes up, it could do more that just move you to a higher tax bracket—you could potentially lose certain deductions and tax credits.

Click below to find out how you can use tax-deferred or even taxable accounts to preserve and grow your windfall.

Read More on Betterment

Gene Upshaw Player Assistance Trust Fund

Apply Today

All Resources

Tell Me More

How to Dispute Mistakes On Your Credit Report

Do your research and know who to connect with.

Read More

These 5 tricks will help you spend less this holiday season

You don't have to choose between spending a lot or skimping on gifts this year.

Read More

The Fed did it, again.

How another supersize rate hike may shake up your finances.

Read More

What is an Adjustable-Rate Mortgage?

When does it make sense to choose an ARM?

Read More

Your Values Can Be Compromised When You're Under Stress

Here's How to Get Them Aligned Again

Read More

Green vs traditional Mediterranean diet

Which is best for burning internal (visceral) fat?

Read More

Why We All Should Get Screened for Anxiety

The importance of diagnosing and treating anxiety.

Read More

9 Ways To Make Divorce Easier On Kids

Divorce is hard on everyone involved. But it can be especially tough on kids

Read More