Several United States-based employees will enjoy their holiday bonuses this Christmas as companies tend to express their gratitude for their employees’ effort during the festive period.
Some employers opt for a personalized gift, a monetary award, or even paid time off, while others may avoid bonuses for all employees to promote morale within the organization.
How to avoid paying taxes on your holiday bonus?
In the event you receive a separate payment from your regular paycheck, your bonus will be taxed at a flat rate of 22 percent. Meanwhile, if your employer decides to include it in your paycheck, it will be taxed as regular income.
It has to be noted that you can’t avoid taxes on your bonus, but there are a few ways to minimize them. For instance, you can consider using some or all of the bonuses to raise your contributions to the 401(k) plan.
You may contribute up to $22,500 in total in 2022, with a catch-up contribution cap of $7,500 for individuals who are 50 years of age or older.
Contributing to a regular IRA account is another method you could use to be able to reduce the amount of tax you owe on a bonus check.
You can deduct such contributions from your pre-tax income, which reduces the amount of income that is subject to tax and helps offset the tax burden associated with your bonus payment.
Meanwhile, you can only deduct your contributions to a retirement plan at work, such as a 401(k), if your income is below a particular threshold. The maximum for single taxpayers in 2022 is $78,000, and the maximum for married couples filing jointly is $129,000.
For 2023, the maximum is $136,000 for married couples filing jointly and $83,000 for single taxpayers. The income threshold for deducting contributions is $214,000 for 2022 and $228,000 for 2023 in the event if you don’t have a retirement plan but your spouse does.