Need help with a large bonus

[Dilbydog]

I am currently on track to receive a large bonus in Q1 of 2017. The bonus will be in the neighborhood of $450K-$500K, and I'm trying to figure out how to not get absolutely hammered in taxes. The thought of $190k - ish going to the government is rather unappetizing. Here are my particulars:

Single
Mid-30's
Max out 401K
Roth IRA
Max out HSA
Current Salary $188k
Rent primary residence
$0 debt

I currently live in Nevada (remote work project) and have Nevada residency, so no state income tax. However, I will be back in the greater Bay Area by the end of this year.

[littlebird]

Can you request that the bonus be split between December of '16 and January (or later) of '17?

[Dilbydog]

Can you request that the bonus be split between December of '16 and January (or later) of '17?

Possibly... It depends on when my project closes. Odds are its all going to be in 2017.

[Lafder]

You are already maxing out your pretax accounts. Continue to do so.

Any chance it is time to put some money into a house, or save a chunk of this bonus as a future home deposit in a very safe way ?

Put enough to pay taxes aside.

Look into charitable contributions as a way to lower taxable income vs paying taxes on it.

Invest the rest according to your desired AA in taxable accounts.

Wow to the amount!

Do you have a will and estate plans in place?

lafder

[Watty]

I currently live in Nevada (remote work project) and have Nevada residency, so no state income tax. However, I will be back in the greater Bary Area by the end of this year.

The California taxes will be a killer on that if you move there and the bonus is taxed.

I don't recall the details but when I left California and had to file a partial year California tax return I remember that there were a lot of unfavorable calculations in how the income and deductions were prorated so do not make any assumptions on how much they will want in taxes. Find out for sure.

One option I would take a hard look at is delaying the move until after you get the check and then taking a sabbatical for the rest of 2017 then moving to California in 2018.

Between paying $50K(ish) in California taxes on the bonus if you move and the California and Federal taxes on your income for the rest of the year you might clear very little by working an extra 9 months after you get the bonus.

You may be able to max out your 401k in the first month or two of 2017 before you go on the sabbatical or have 401k money taken out of the bonus.

I don't know much about them but if you support charities then you might be able to create a donor advised funds and then distribute the money in future years.

[Dilbydog]

You are already maxing out your pretax accounts. Continue to do so.

Any chance it is time to put some money into a house, or save a chunk of this bonus as a future home deposit in a very safe way ?

Put enough to pay taxes aside.

Look into charitable contributions as a way to lower taxable income vs paying taxes on it.

Invest the rest according to your desired AA in taxable accounts.

Wow to the amount!

Do you have a will and estate plans in place?

lafder

My initial thought is to dump the whole, after tax, amount into a down payment on a home. However, the talking heads in Silicon Valley seem to believe that a housing bubble exists, and that said bubble is starting to slowly unwind. So there is hesitation on my part to pull the trigger on a home, especially if housing begins to decline in the next several quarters. I am also aware that I shouldn't be trying to time a housing market, especially this one.

However, there is a very strong possibility that another bonus of similar size will be attained in Q1-Q2 of 2018. Project pipeline and position are unclear beyond that point. So do I wait, sit on the after tax money, try to make a little money while waiting for "next" bonus, assuming it looks like a sure thing?

I never considered a will or estate plans... As I still have that immortal mentality. But that IS something I need to get in place. Thanks for the heads up!

[Dilbydog]

I currently live in Nevada (remote work project) and have Nevada residency, so no state income tax. However, I will be back in the greater Bary Area by the end of this year.

The California taxes will be a killer on that if you move there and the bonus is taxed.

I don't recall the details but when I left California and had to file a partial year California tax return I remember that there were a lot of unfavorable calculations in how the income and deductions were prorated so do not make any assumptions on how much they will want in taxes. Find out for sure.

One option I would take a hard look at is delaying the move until after you get the check and then taking a sabbatical for the rest of 2017 then moving to California in 2018.

Between paying $50K(ish) in California taxes on the bonus if you move and the California and Federal taxes on your income for the rest of the year you might clear very little by working an extra 9 months after you get the bonus.

You may be able to max out your 401k in the first month or two of 2017 before you go on the sabbatical or have 401k money taken out of the bonus.

I don't know much about them but if you support charities then you might be able to create a donor advised funds and then distribute the money in future years.

I am still working on maintaining my NV residency through 2017, to see how I can limit my exposure to CA tax.

[spth]

Any plans to get married?

[Watty]

I never considered a will or estate plans... As I still have that immortal mentality. But that IS something I need to get in place. Thanks for the heads up!

Also make sure that you have high limits on your car insurance and an umbrella policy. Once you have more assets you are more likely to be sued.

[HomerJ]

Any plans to get married?

Heh, this made me think of the Shawshank Redemption and Andy Dufresne asking the head guard if he trusts his wife on that rooftop.

"Because if you do trust her, there's no reason you can't keep all that money!"

[Dilbydog]

No plans on getting married, at least not in the next 18-24 months.

I currently carry $300k/$500k for auto coverage with $1M umbrella.

[campy2010]

Any plans to get married?

I'll volunteer. As long as there's no pre-nup.

[Lafder]

If you are pretty sure you want to end up in Silicon Valley, as long as you stay there long past a housing bubble, who cares.

((Sure great to wait and buy at the next low, but what if that is 20 years from now??))

At this point prices are continuing to climb so I am going to take a chance and say we are not yet at the top of the bubble.

Homes are getting multiple offers and it is hard to find a place and get it. At least that is what I heard.

((A friend bought a 1300 sf home in San Jose for 875k, 75k over asking with multiple offers, in the past year. She said it has already gone up from there in the time they have owned it.))

If it were me and I knew I wanted a home there, I would go for it But it is one of my more favorite parts of the world so I am a bit biased.

lafder

[Zendelta]

Congrats.

In addition to the will/estate planning, you might want to lock in a good private disability insurance policy after the numbers hit your W2, assuming your work does not cover you 100%.

When I got mine, they took bonus #s into account. Even covering the remaining 40% that work did not have a policy for, I'm at a payout level that will essentially be my current base salary should I ever need to use the policy. (Income will actually be more because the payments are untaxed.) You are also likely to be the healthiest you will be to qualify for the best rates.

[riverguy]

There's really no way to protect that from taxes. Be happy you got a bonus of that size and pay Uncle Sam.

[furnace]

I am currently on track to receive a large bonus in Q1 of 2017. The bonus will be in the neighborhood of $450K-$500K, and I'm trying to figure out how to not get absolutely hammered in taxes. The thought of $190k - ish going to the government is rather unappetizing. Here are my particulars:

Single
Mid-30's
Max out 401K
Roth IRA
Max out HSA
Current Salary $188k
Rent primary residence
$0 debt

I currently live in Nevada (remote work project) and have Nevada residency, so no state income tax. However, I will be back in the greater Bay Area by the end of this year.

Take $190k to a Vegas casino. If you win, that is your tax payment. If you lose, you get a tax deduction

[Nowizard]

Ultimately, the only way to avoid the taxes is to reduce your taxable income, and you have already taken care of the obvious ways to do that. It appears that this may be the first time for a bonus of this magnitude, but that may become the "new normal," at least for the following tax year. If that is the case, then this is more than a one year "problem" and may become an annual combination of positives and negatives. Is it possible for the company to give you stock or equity in the company? To limit state taxes, you obviously would have to consider maintaining a primary residence in a state with no income tax. It sounds like the long term issue is whether you will choose a lifestyle that minimizes taxes to a more desired level or to live a lifestyle that you will be quite able to fund even though April 15 will be one of your least favorite days of the year.

Tim

[lvrpl]

I am currently on track to receive a large bonus in Q1 of 2017. The bonus will be in the neighborhood of $450K-$500K, and I'm trying to figure out how to not get absolutely hammered in taxes. The thought of $190k - ish going to the government is rather unappetizing. Here are my particulars:

Single
Mid-30's
Max out 401K
Roth IRA
Max out HSA
Current Salary $188k
Rent primary residence
$0 debt

I currently live in Nevada (remote work project) and have Nevada residency, so no state income tax. However, I will be back in the greater Bay Area by the end of this year.

So I have to ask out for curiosity's sake - what kind of work do you do, if you don't mind sharing?

Also, what state are you currently working in on this project? Are you sure you won't have to pay some income taxes to that state because the income was earned there? This would be the case in many states, but not all.

[Billionaire]

Take $190k to a Vegas casino. If you win, that is your tax payment. If you lose, you get a tax deduction

Wrong. Gambling losses are only deductible up to the amount of winnings.

[Nebster]

The only non-obvious way to shield large wage income from tax is to contribute to a DAF. But the magic of it is just that it lets you front-load any charitable giving you were planning to do later in life. If you weren't going to give anything, don't know how much you might want to give, or want/need to use the income for something else today, it can't help you reduce the taxes.

Another thing you can do is go out and take an extra 190k advantage of all the public resources that you'll be funding. You know, drive hard on all that federal asphalt, maybe get lost at sea and trigger a Coast Guard rescue, etc.

[Dilbydog]

Ultimately, the only way to avoid the taxes is to reduce your taxable income, and you have already taken care of the obvious ways to do that. It appears that this may be the first time for a bonus of this magnitude, but that may become the "new normal," at least for the following tax year. If that is the case, then this is more than a one year "problem" and may become an annual combination of positives and negatives. Is it possible for the company to give you stock or equity in the company? To limit state taxes, you obviously would have to consider maintaining a primary residence in a state with no income tax. It sounds like the long term issue is whether you will choose a lifestyle that minimizes taxes to a more desired level or to live a lifestyle that you will be quite able to fund even though April 15 will be one of your least favorite days of the year.

Tim

You are correct, this will potentially be the largest bonus I've received. An equity stake in the company is not an currently an option for my position, my understanding is that company stock is only available to the C level folks. While I know the primary focus of my post was to minimize my tax exposure. Ultimately my goal is to maximize these two windfalls in a way that provides me with as much financial freedom as possible. I want to own a home, renting for the long term does not appeal to me, and, ensure that my future family is as comfortable (read free of financial stress) as possible. I'm not looking to not work, I just want to use it in a way where I'm not constantly fearful of keeping my job. Not that I worry about losing my job, the circumstances of my upbringing have pounded in the notion that you need to work everyday, you don't take vacations, and your biggest concern is not having a sufficient income stream.

[Cuzz35]

The only other option I know of would be to buy into a conservation easement deal. Basically hese are syndicated partnerships that own a piece of land. They gather a bunch of investors and then donate the property usually to a governmental agency or land trust for conservation purposes.

The investors are then allocated a charitable contribution which is the difference between the value of the raw land as it stands and a hypothetical highest and best use of the land were developed.

Bottom line is most people put in $1 and get back between $4-$4.25 charitable contribution. So if your at a 40% tax bracket, at $4 you save $1.6 netting $.60.

The maximum deduction is limited to 50% of your AGI. So a $300k deduction would take an investment if about $75k and you'd reduce your liability by around $120k. Netting you $45k. Note I did not take into account state taxes more did I assume a max contribution. Most deals I see are closer to a 4.25/1 deduction to contribution ratio.

Also, there is risk involved as these deals can be audited and the valuations can be adjusted which would lower your returns. Ive only seen one deal audited and the outcome has not yet known.

[Watty]

I want to own a home, renting for the long term does not appeal to me, and, ensure that my future family is as comfortable (read free of financial stress) as possible. I'm not looking to not work, I just want to use it in a way where I'm not constantly fearful of keeping my job. Not that I worry about losing my job, the circumstances of my upbringing have pounded in the notion that you need to work everyday, you don't take vacations, and your biggest concern is not having a sufficient income stream.

Some people call that financial independence as a goal instead of retirement as a goal.

If you have not lived in the Bay Area before it would be good to rent there for at least a year to decide if the high prices are worth it to you. It varies a lot with your lifestyle and a lot of other factors but there are many nice low cost of living parts of the country where you could be financially independent with a net worth of a million dollars or so. In the Bay Area it would be many times that because of the high costs. The Bay Area also tends to higher pressure and work centered in some fields.

It would be good to look at how you can structure your investments so that if you ever get divorced your assets will be protected. If you are not in a relationship right now this is a good time to do this since any concern that any plans might be a sign that you didn't trust a particular person.

If you are not able to take an enjoy things like vacations and are too focused on work then for the long term that is not good for your career since you will get burnt out and it will be hard to have a good relationship with a spouse and kids. Some people that don't have a good work life balance end up working until they are 65 and retire only to find that they can't enjoy their retirement because don't have much of a life outside work.

[Afty]

One other possibility is that your company may offer a nonqualified deferred compensation program. This lets you defer part of your compensation, and income taxes, to some future time. If you have plans to retire or take unpaid time off, or expect a low-income year for another reason, you could defer some of the compensation to that time.

More info: https://www.fidelity.com/viewpoints/retirement/nqdc

[unclescrooge]

I currently live in Nevada (remote work project) and have Nevada residency, so no state income tax. However, I will be back in the greater Bary Area by the end of this year.

The California taxes will be a killer on that if you move there and the bonus is taxed.

I don't recall the details but when I left California and had to file a partial year California tax return I remember that there were a lot of unfavorable calculations in how the income and deductions were prorated so do not make any assumptions on how much they will want in taxes. Find out for sure.

One option I would take a hard look at is delaying the move until after you get the check and then taking a sabbatical for the rest of 2017 then moving to California in 2018.

Between paying $50K(ish) in California taxes on the bonus if you move and the California and Federal taxes on your income for the rest of the year you might clear very little by working an extra 9 months after you get the bonus.

You may be able to max out your 401k in the first month or two of 2017 before you go on the sabbatical or have 401k money taken out of the bonus.

I don't know much about them but if you support charities then you might be able to create a donor advised funds and then distribute the money in future years.

+1

If you move to CA halfway through the year and make say $100k, you think you'd owe CA taxes on the $100k you earned in CA. And you'd be wrong.

I "believe" you owe CA taxes on 50% of your annual income for the whole year!!!

[Nearly A Moose]

Take the money
Don't try to be too cute with it
Hold your nose and pay the taxes
Enjoyed your 200-300k that is yours outright, that will never be taxed again (for you at least)

This is a lot of money, but not so much than it's worth creating a side-job of hustles to get a little extra tax sheltering. You can see if there are creative compensation options, but frankly if take it and run. Once it's yours, it's yours, with zero additional effort.