For example, a one-time bonus of $5,000 added to your paycheck of, say, $35,000 could throw you into a different tax bracket, making the amount of income tax you owe higher since your total income is higher. A single person in the US who makes $35,000 a year is currently in the 12% tax bracket, but an income of $40,000 a year (which the bonus would take you to) would kick you up to the 22% bracket. [3] X Research source
Option 1 - The “percentage” method. This is where a flat rate is applied to your bonus amount. A “flat tax” of 22% on bonuses is stipulated per IRS Publication 15. Option 2 - The “aggregate” method. Here, the employer combines your regular income and your bonus, but uses a formula to calculate the tax on each separately. Option 3 - The “single payment” method. Your bonus and regular wages are combined, taxed together, and paid together. [4] X Research source
Determine the withholding amount (based on IRS withholding tables) for the $7000 total. For our example, we’ll use a figure of $2100 as the total withholding amount on the $7000. Subtract the $500 normally withheld from your paycheck from the $2100 (total tax due on the $7k). The remaining $1600 will be deducted from your bonus check. [6] X Research source
However, the employer doesn’t give you your regular paycheck plus a separate bonus check. Rather, you get one paycheck for the $7000 less the total withholding of $2100.
Deferring doesn’t always reduce your tax liability. In most cases, it’s just moving from one tax period to the next. If next year’s income and taxes will not be lower, there’s usually no advantage to deferring.
Note that there are income limitations for deducting traditional IRA contributions.
This is only helpful if you itemize your deductions rather than taking the standard deduction. #*Note that there is now a limit on state and local tax deductions of $10,000. If you have already paid $10,000 in total state and local income taxes plus property taxes, it would not make sense to pre-pay your property taxes.
Make “green” home improvements. Residential energy-efficient home improvements (like solar water heaters and solar panels) may provide you with a tax credit of up to 30% of the cost of the improvements. [11] X Research source Earn tax-free income. Some income or benefits may not be subject to income tax, thus lowering your tax liability. Consider investing in tax-exempt bonds [12] X Research source or opening a health savings account. [13] X Research source Tax-free income sources may still trigger alternative minimum tax in some cases, so it’s smart to consult with a tax accountant for advice. [14] X Research source Look into a child-care reimbursement account. If your employer offers one, use it. You’ll be paying your child-care bills—but with pre-tax dollars. Let’s say you have $5000 in child care expenses per year. You’d probably have to earn about $7500 to net that $5000, because of the taxes on that income. With a child-care reimbursement account, you avoid both income and Social Security taxes. [15] X Research source See other wikiHow articles, including Save Money on Taxes and Pay Less in Taxes, for more tips.
