For most people, this year’s deadline to file federal income tax returns is Tuesday, April 18. Victims of winter storms in New York have until May 15 to file their returns, and storm victims in Mississippi and Arkansas have until July 31. The deadline has been postponed until Oct. 16 for disaster-area taxpayers in most of California, parts of Alabama and Georgia. Please make sure you double-check your filing deadline if you are in any of the affected areas on the IRS website’s Tax Relief in Disaster Situations page.

Often, employers often pay bonuses to their employees early in the year. Being awarded a bonus on top of your pay is a nice sign of appreciation, but it also comes with an uncertain tax situation, and you may owe more taxes than you planned. Bonuses, tips and commissions are considered supplemental wages, and they are subject to taxes with their own rules for withholding. If you receive a separate bonus check, it falls into one of two categories:

• For amounts under $1 million, employers withhold 22%.
• For amounts over $1 million, employers withhold 22% for the first $1 million and 37% for the remainder.

A bonus is treated as regular income. If you are in a tax bracket that is less than 22%, your employer will have over-withheld, and you may receive a refund for the difference. If you are in the tax bracket over 22% (income of $41,775 to $89,075 for single filers and $83,550 to $178,150 for married filing jointly), your employer will have under-withheld, and you may owe the difference between what was withheld and your total tax.

If your bonus is included in your regular paycheck, then it will withhold taxes using the aggregate method, which uses the total amount to calculate the withholding. For example, if you normally withhold 35% of your pay for taxes, the amount of withholding on your bonus also will be 35%. This tends to be a more accurate method for taxes and is less likely to leave you with a surprise bill at tax time.

Regardless of which method your employer uses for bonuses, a bonus is subject to state tax if applicable, as well as Social Security and Medicare taxes. If you are deferring income into a 401(k), a portion of the bonus may be withheld for that as well — an important consideration if you don’t want to frontload your 401(k) and have most of the money invested early in the year. We are happy to guide you on how to spread the payment into the 401(k) over the year.

A couple of strategies to reduce tax payments down the road are:

• Find ways to reduce your taxable income such as maxing out contributions to your 401(k) or HSA. If the bonus significantly increases your taxable income, consider bunching charitable donations.
• If you don’t have a work-sponsored retirement plan, contributions to an IRA can reduce your tax burden. These contributions can be made until the filing deadline in April.
• Review your W-2. You may be able to time when you receive the bonus or defer the bonus for tax purposes. You also may raise your withholding on your regular wages if you know that your bonus is going to be larger.

It is important to remember that filing for an extension does not provide you any additional time to pay the tax if you owe more than what you withheld. When you file an extension, you must estimate the tax you owe, and this should be paid by the April filing date. If you don’t, you may owe interest and possibly penalties as well. If you are expecting a refund, the IRS encourages you to file your return as soon as possible and anticipates most tax refunds to be issued within 21 days of the IRS receiving the return.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Broadridge, Investopedia, CNBC

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.