Personal Finance

The best way to use a tax bill bonus

Key Points
  • AT&T, Comcast, Fifth Third, Sinclair Broadcast Group and Bank of America plan to give many employees a $1,000 one-time bonus.
  • Bonuses may have more taxes withheld, which means the check could be less than you expect.
Comcast to give $1K bonuses following tax bill passage
Comcast to give $1K bonuses following tax bill passage

Spurred by the passage of the GOP tax plan, a number of companies have announced plans to share part of their tax windfall with employees by giving one-time bonuses or increases in their minimum wages.

But don't be so quick to count the ways to spend that money.

Details like exactly which workers are eligible for a bonus and when the payouts will happen are unclear in some cases. Plus, tax withholding could take a bigger-than-usual bite out of those bonus checks.

"It's exciting to contemplate what you'd do with any amount of extra money, but it might cause you to make financial decisions that don't look so good in hindsight," said Kathryn Hauer, a certified financial planner with Wilson David Investment Advisors in Aiken, South Carolina.

Among the companies announcing worker windfalls, AT&T said it will give a $1,000 bonus to more than 200,000 U.S. employees: That applies to all union-represented, nonmanagement and front-line managers. Comcast, which owns CNBC parent NBCUniversal, also said it plans to give $1,000 bonuses to more than 100,000 eligible employees.

Sinclair Broadcast Group of Baltimore says it will give a $1,000 bonus to almost 9,000 full- and part-time regular employees, and Bank of America alerted employees in a memo obtained by CNBC that U.S. employees earning up to $150,000 annually — about 145,000 workers — will get a $1,000 bonus by the end of the year.

(See chart above for how these amounts compare with average bonuses this year.)

Meanwhile, BB&T has announced it will pay $1,200 bonuses in January to almost three-fourths of the bank's associates (about 27,000), and will raise its minimum hourly pay rate to $15 from $12, effective Jan. 1.

And Cincinnati-based bank Fifth Third said it will give $1,000 bonuses to some employees, along with increasing the minimum wage it pays workers to $15. Wells Fargo also is increasing its minimum wage to $15.

Hauer recommends taking time to contemplate your options before spending money in anticipation of extra cash not yet received.

"We start spending money in our head long before we have it," she said. "If we know — or even just think — we're getting a bonus, we tend to be less careful with our purchases and financial choices."

First things first: If you work at one of the companies awarding bonuses, check with your human resources department about your eligibility.

It's exciting to contemplate what you'd do with any amount of extra money, but it might cause you to make financial decisions that don't look so good in hindsight.
Kathryn Hauer
Wilson David Investment Advisors

Even if you're sure you'll get a bonus, remember that the taxman gets a piece before it even reaches you. And because of the way bonuses are taxed, you might see a higher-than-normal withholding when you receive that extra pay.

The IRS allows companies to use several methods to withhold taxes from bonuses, which the agency considers "supplemental income." The first way would reduce your bonus by a flat rate of 25 percent regardless of your tax bracket. The other method would withhold taxes at whatever rate your regular income is taxed. (Bonuses above $1 million are taxed differently.)

Either way, the amount could be smaller than you expect. However, at tax-filing time, you could see a refund if too much were withheld.

Here are some wise ways — albeit not as exciting as a shopping spree — to use the surprise bonus.

AndreyPopov | Getty Images

Pay down debt

Consumer credit card debt stands at $808 billion, according to the Federal Reserve Bank of New York. The average interest rate on credit cards is 16.75 percent, according to

"The absolutely best thing you can do with any extra money is pay down credit card debt," Hauer said. "It doesn't sound fun, but it's the wisest thing you can do financially."

Invest it

If you don't have credit card debt, you could put it in your retirement savings (i.e., your individual retirement account) or a child's 529 college savings plan. Depending on other elements of your tax situation, those contributions could be deductible. You have until tax day (April 17) to make a 2017 contribution to your IRA.

If we know — or even just think — we're getting a bonus, we tend to be less careful with our purchases and financial choices.
Kathryn Hauer

Donate it

If you are charitably inclined, you could donate your bonus to a charitable organization and get a deduction for it.

If you typically itemize your deductions and can make the donation this year, all the better.

Basically, to get a tax break for the donation, you must itemize. While the tax bill retains the deduction for charitable giving, fewer taxpayers will end up using it because their deductions will not exceed the new, nearly doubled standard deduction.

"The charitable deduction will probably help you more this year," Hauer said.

Do repairs

If you've been putting off a repair — say, to a car or a household appliance — consider using the extra money to fix the issue. Some minor problems can snowball into major headaches and become necessary expenses.

"When the bigger problem does hit, you might have already spent the money and have to put the cost on a credit card," Hauer said.

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