– Taxpayers should consider their new tax bracket when receiving a raise or bonus, as it is determined by the amount of taxable income.
– Due to inflation, tax brackets for 2023 have increased, allowing individuals to potentially receive a raise and bonus without moving into a higher tax bracket.
– For example, if someone was in the 37% tax bracket in 2022 with a $650,000 salary, a 5% raise and a $10,000 bonus for 2023 would place them in the 35% tax bracket due to the increased threshold for the 37% bracket. – Complete a 2023 tax projection to estimate the tax liability in the higher tax bracket.
– Compare tax withholdings to estimate whether there will be a balance due with the return.
– If there is a balance due, options to manage the anticipated liability include paying the balance due and meeting an estimated payment safe harbor to avoid underpayment penalties.
– The estimated payment safe harbor can be met by paying in 110% of the prior-year tax liability or 90% of the current-year tax liability.
– If the adjusted gross income is $150,000 or more, the 110% of prior-year method is required for estimated tax payments.
– Extra payroll withholding can be used to increase taxes paid, and a new Form W-4 will need to be completed and submitted to the payroll department. – To reduce tax liability, one can consider increasing salary deferrals to their employer’s qualified retirement plan, such as a 401(k) plan.
– Another option is to increase charitable contributions to add to itemized deductions and reduce taxable income, though the individual should ensure they can actually use the deduction.
– It’s important for individuals with higher income to be proactive about their new tax situation and consult with a trusted tax professional.
https://www.firstcitizens.com/wealth/insights/planning/tax-planning-considerations-when-getting-raise
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