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I am a US citizen living in the US. I am thinking about taking an offer from a company which provides a signing bonus.

My question is;

Does it make more sense to select a start date past January 1st, 2021 (I am gainfully employed currently... lack of income in an interim period is not a concern) for the purposes of deferring taxes to a later time?

It seems pretty straightforward from a math perspective. If I receive the signing bonus in 2021, I have 18 months before that money gets taxed (April 2022), meaning it has a decent amount of time to increase via some investment. If I receive the signing bonus before the end of 2020, I will need to pay taxes on this money in April 2021, less than 10 months away.

As I said, this seems pretty obvious and straightforward, but I simply have never thought about this before and I want to make sure I am not missing anything.

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    Is it even legal in the US to arrange the timing of future payments to reduce your effective tax rate? I'm getting a hint of xkcd.com/1494 from this question, but with more exotic laws.
    – bobsburner
    Aug 27 '20 at 21:42
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    Does usa have a flat rate tax for that? in that case deferring the paying might be helpful. In many countries with some sort of progressive tax percentage however you would be better off taking the signing bonus during the year that you don't yet have full income for the year. Aug 28 '20 at 6:53
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    @bobsburner This isn't arranging the timing of future payments, it's arranging the timing of future earnings. The former would be OP accepting the position now (and thus becoming entitled to the bonus) but asking his employer to delay the actual payment until January. In the latter case OP has not earned (become entitled to) the bonus until January.
    – JBentley
    Aug 28 '20 at 7:56
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Most likely the company will withhold a portion of the bonus for tax purposes already. So then it really depends on your withholding rate. If they don't withhold enough and you're going to owe some tax come April of the following year, then you're slightly better off being able to delay that payment so you can earn some interest until then. If you're going to get a refund, then you're slightly better off receiving the refund sooner than later. But note you can always adjust your withholding amounts throughout the year if need be. Since your gain or loss would basically be how much interest you can earn on only the difference from withholding, it's likely to be nearly negligible. I wouldn't select a start date based on some nominal amount of potential earned interest. Choose it based on what will make you happiest overall.

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    There is also a 6% penalty if you under-withhold by more than 10% or 1000 USD.
    – jpa
    Aug 27 '20 at 13:48
  • @jpa Yes, thank you for mentioning it. Here's the form to calculate and pay estimated taxes if needed: irs.gov/pub/irs-pdf/f1040es.pdf
    – TTT
    Aug 27 '20 at 14:37
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    IIRC, if your total withholding for year N is at least as much as it was for year N-1, there won't be any penalty. Aug 27 '20 at 16:42
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    @jpa+ whoever wrote that investopedia article couldn't read. The fixed 0.5%/month = 6%/yr penalty is for nonpayment after the filing deadline (April 15) and is in addition to interest. The 'penalty' for underpaying within year -- unless you get the safe harbor of withholding + estimated >= prior year tax (110% if AGI over $150k) -- is actually computed as interest at the rate set for each quarter lagging the Treasury market +3%; 2020Q2 was 5% (because in Q1 the Fed had tightened a little) but Q3 is 3% and Q4 and 2021Q1 undoubtedly will be; see form 2210 and instructions. Aug 28 '20 at 4:03
  • @dave_thompson_085 wouldn't be the first time investopedia got something wrong. 😉
    – TTT
    Aug 28 '20 at 4:20
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At current interest rates, the amount of money is likely to be pretty low. If the tax on the bonus is $10,000, then you might make $100 by having it for an extra year — one year CD rates are around 1% at the moment. You can’t invest it it anything that’s higher risk and potentially higher return, of course, because then you would risk not having enough to pay the tax when it came due.

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    I agree that the amount of money involved is not much. I disagree about the amount that can be put at risk. The only amount that should not be put at risk is the amount of tax that would be due. The remainder can be put in a riskier investment, if so desired.
    – Itsme2003
    Aug 28 '20 at 5:36
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    Yes, but the amount of tax is the only amount we’re talking about here. If he takes the bonus earlier and pays the tax earlier, he can still invest that amount after tax in whatever he wants.
    – Mike Scott
    Aug 28 '20 at 6:38
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There are several things to consider regarding this bonus, but first an assumption that the bonus will be less than $1 million. If it is above $1 million the excess is withheld at 37% for federal taxes.

If it is less than $1 million then it is most likely going to be withheld at 22%, unless it is paid in the same check as your regular pay, then it is withheld at whatever level the bracket the combined check will fall into. All this is covered in Circular E from the IRS. State taxes will depend on the state involved.

Remember it doesn't matter if you cash the check in January, if they send you the check before then, it will be considered income this year.

I am assuming that you are actually going to wait to start the job, and they are willing to wait that long; or they are agreeing to wait until January to pay the bonus. Not that many companies will wait months for somebody to start.

I would consider which year to get paid a large bonus based on how it will impact the current and next tax year. If getting the bonus this year will move you out of being eligible for making a deductible IRA contribution, or being able to contribute to an Roth IRA that would be a consideration. That would be even more so if you already made the contribution because you knew you were going to be under the threshold. Delaying to next year allows you to plan better.

There could be other programs that if your 2020 income is too high, you would be ineligible. The 2020 stimulus payment for example. If for some reason you didn't get the check already because your 2018 or 2019 income was too high, and by delaying the bonus you will get a credit when you file in April 2021, that could be a reason.

In the past some people delayed pay into the next year because the tax rates will be going down. This works if the legislature gives enough time to act.

Speaking of bonus checks, don't forget you may be getting a check from your old company if they are going to pay you for your vacation and sick leave balance. That will also be withheld as described at the top of this answer.

If you are going to invest the difference between the tax rate of the last dollar for 2021 and the amount it was withheld make sure you can pay the taxes when they are due, so that you don't get into a bind when you have to pay the IRS.

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  • With or without the bonus I make too much to contribute to a Roth IRA and too much to receive a stimulus check, but I see your point. Didn't realize that bonuses are below $1 million are taxed flat at 22% and not as regular income, though.
    – Runeaway3
    Aug 27 '20 at 15:24
  • Just to clarify: I believe they are taxed as regular income, but your company can choose to withhold at 22% ... meaning at end of year, you may have to chip in more if you're above the 22% bracket
    – Foon
    Aug 27 '20 at 21:12
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Even if you do defer most of the tax payments until the following April, you're still theoretically required to make quarterly estimated payments - the payment for Q1 being due April of the current year. So you'd really not change the payment's due date significantly (a few months later).

This would only apply if the bonus was big enough to require you to make estimated tax payments, of course.

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