If you work at one of the dozens of companies that are awarding one-time cash bonuses — stemming from passage of the GOP tax plan — you might wonder how much cash you'll actually see.
The short answer: Don't be too quick to count the ways to spend the entire windfall.
While many of the announced bonuses are for $1,000, the final amount might leave you disappointed.
That's because the taxman gets a piece before it even reaches you. And due to the way bonuses are initially taxed, you might see a higher-than-normal withholding when you receive that extra pay.
In general, the federal supplemental tax rate of 22 percent applies, plus Social Security, Medicare, unemployment and your applicable state and local taxes. The federal rate may be more or less than your regular federal, state and local withholdings, depending on your income level. (See the new withholding rates below).
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 22 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. Bonuses are added to whatever you've earned for the year when computing your tax bill.
"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 Aiken, South Carolina-based Wilson David Investment Advisors.
Some of the best-known U.S. companies — including Walmart, AT&T, CNBC parent company Comcast and Bank of America — have announced that because of the reduced corporate tax rate in the Tax Cuts and Jobs Act, they will award one-time bonuses or increase the minimum hourly rate they pay workers. On Thursday, Home Depot became the latest to announce that it would award $1,000 bonuses to its workers.
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.
Then, here are some wise ways — albeit not as exciting as a shopping spree — to use the surprise bonus.
Consumer credit card debt has reached its highest level ever: more than $1 trillion, according to the Federal Reserve. The average American has a credit card balance of $6,375, up almost 3 percent from a year ago, according to a recent study by Experian.
Meanwhile, the average interest rate on credit cards is 16.75 percent, according to Bankrate.com.
"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."
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 you are charitably inclined, you could donate your bonus to a charitable organization and get a deduction for it.
Basically, to get a tax break for the donation, you must itemize. While the recently passed 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 of $24,000 for a married couple filing jointly.
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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