When to Refuse Your Year-End Bonus - It doesn’t seem right but sometimes you actually lose more money
when you make more money. That is just the way our tax code works and
the last thing you want is to be caught off guard when it happens.
Most people think that it is always better to have higher income
because we don’t have a 100% income tax rate on earned income. With
every dollar you earn, even at the highest federal tax rate of 35% and
combined state and local income tax rate of 12.7%in New York City, you
are still “only” paying just under half of your income in taxes. You’d
still get to keep a little over half of what you made.
Yahoo! Finance/Thinkstock - briefcase cash
However,
that is not always true. When high income taxpayers hit certain
thresholds in adjusted gross income, they lose the ability to take some
deductions. In some cases, earning $10,000 more can cause the IRS to
disallow more than twice that much in deductions, so essentially you
make a dollar and then lose two. You put your heart and soul into your
job to help your company get ahead and to help your career, only to lose
money doing it. It could actually be in your best interest not to take
the bonus.
A
great example is passive losses on rental real estate property, and
this one is a thorn in my side as it affects me personally. Once your
adjusted gross income is over $150k, the IRS only allows you to take
your real estate losses of up to $25,000 – such as depreciation,
association dues, mortgage interest, property taxes, maintenance etc. –
against passive income such as your rental income. Any losses above and
beyond the gains must be “carried forward” to future years, either when
you sell it or when your income is below the threshold. So in other
words, the rental loss is just about useless in the current year.
If
your adjusted gross income is $151,000, you may be shut out of any
rental deductions for your current tax return and you just have to hope
you can use them in the future.
Here are some income levels where
deductions were recently phased out and will have an impact on married
taxpayers that file jointly in 2012:
So
if your adjusted gross income is over $160k, you just lost out on the
tuition deduction, child credits, student loan interest, rental real
estate deduction and a lot more. It could get worse going forward with
the federal deficit running at $1 trillion for
the fourth straight year, making our total national debt over $16
trillion dollars. Something has to be done and both parties target high
income earners to pay more either by raising the top tax rates or by
reducing deductions allowed.
If
you are on the edge of making too much to take advantage of valuable
tax deductions, what can you do about it? Here are some strategies to
consider:
1. Take the pain every other year. Delay your bonus into the following year if you are close to a threshold. This way you have high income every other year and you may be able to take the deductions on your “low” years. This is a strategy I used in 2010. Because my company was flexible in the timing of annual bonuses, I was able to take a 2009 bonus in early 2010 and then took the 2010 year- end bonus in the same year. This helped me to become eligible for some deductions on my 2009 taxes.
2. Max out all your pre-tax options such
as your pre-tax 401(k) plan for a maximum of $17,000 in 2012 (going up
to $17,500 in 2013) and if you are over 50, you can do an additional
$5,500. Use your flexible spending account ($2,500 limit in 2013)
or health savings account ($3,250 for single plans and $6,450 for
family plans in 2013) to pay for your out-of-pocket medical costs on a
pre-tax basis. It doesn’t seem like a lot but if when you add the two
up, you can reduce your taxable income by $20,000 or more.
3. Defer your compensation. Take advantage of executive deferred compensation plans
your employer offers and put your bonus in this plan instead. With
deferred comp, you have to select your deferral amount before the
beginning of the year so you’d need to plan for next year. Also similar
to a 401(k), the funds are withdrawn as ordinary income but the
similarity ends in that deferred comp funds are treated as assets of the
company instead of the employee. If a company went bankrupt, the
executive’s funds are at risk.
4. Ask for paid time off instead. Instead
of taking a bonus, negotiate for more vacation time instead. Imagine
taking two weeks off every quarter to spend with your family or simply
to recharge and regroup. If you are losing deductions by making more,
instead get the best of both worlds by gaining more benefits instead.
Think of it as a regular sabbatical.
5. Take the bonus. If
you are a two income household, take the bonus but take a step back and
examine your joint goals. Maybe one of you is more career oriented than
the other, and would like to work less or start a business.
If
your bonuses end up helping the IRS more than they are helping you,
consider alternatives. Look for ways to defer the income in pre-tax
plans or deferred comp, time it so you have lower income earning years
where your deductions can hit instead of “carrying forward” each year,
or look for alternatives that may enhance your life even more. More
isn’t necessarily always better. ( forbes.com )
No comments:
Post a Comment