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My friend has been given a job offer with a generous signing bonus under the label of housing and child-tuition support to help towards the burden of relocation.

The only problem is that the company notes that taxes will reduce the bonus by approximately 30%. They offer to break the bonus up into separate payments.

What is the best mechanism by which that person can reduce the tax burden of the bonus? I assume that splitting the payments up (even over several years) will not reduce the taxes significantly given the high tax bracket that person is in.

Note: That person has not yet accepted the position and so issues like this are negotiable.

Related: How are bonuses taxed? Why is withheld amount not same as final amount?

  • Why is the linked question not answering your query? – littleadv Jun 30 '15 at 4:38
  • The linked question is about the taxation structure of bonuses and the withholding. This is specifically about how to avoid such taxes. – RoboKaren Jun 30 '15 at 9:41
  • Ask the company to gross it up! :-) – Peter K. Jun 30 '15 at 11:29
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Splitting the payments does have one short time effect, the initial withholding may be lower.

Lets say the bonus is $20,000 and they make $60,000 a year. If the company treats it as a lump sum they may withhold 25% for federal taxes. This would mean that $5000 would be withheld right away. It would not matter if the friend was single, married, head of household or had many exemptions on their W-4. If the bonus was added to their monthly salary and appeared to the IRS as a regular monthly salary a bonus that large could cause even more withholding from IRS circular E:

Monthly
Status   Over       but not over    withhold              of excess over—
Single   $15,967    — $34,483..     $3,839.64 plus 33%           —$15,967
Married  $19,921    — $35,008..     $4,298.17 plus 33%           —$19,921

That would put your friend into the the 33% withholding rate for that month. If they are paid every two weeks they could be in the 39.6% bracket for that pay check.

If they split it into multiple payments it could bring the withholding for those months back down to 25%. Of course that does spread out the payments, so if they need the cash to pay for the move that is a consideration.

with a generous signing bonus under the label of housing and child-tuition support to help towards the burden of relocation.

If the friend meets the time and distance test they may be able to claim some moving expenses. This will allow them to reduce their income.

Distance Test

Your move will meet the distance test if your new main job location is at least 50 miles farther from your former home than your old main job location was from your former home. For example, if your old main job location was 3 miles from your former home, your new main job location must be at least 53 miles from that former home. You can use Worksheet 1 to see if you meet this test.

Time Test for Employees

If you are an employee, you must work full time for at least 39 weeks during the first 12 months after you arrive in the general area of your new job location (39-week test). Full-time employment depends on what is usual for your type of work in your area.

For purposes of this test, the following four rules apply.

  • You count only your full-time work as an employee, not any work you do as a self-employed person.

  • You do not have to work for the same employer for all 39 weeks.

  • You do not have to work 39 weeks in a row.

  • You must work full time within the same general commuting area for all 39 weeks.

Once you pas those test you can claim expenses:

Deductible Moving Expenses

If you meet the requirements discussed earlier under Who Can Deduct Moving Expenses, you can deduct the reasonable expenses of:

  • Moving your household goods and personal effects (including in-transit or foreign-move storage expenses), and

  • Traveling (including lodging but not meals) to your new home.

You cannot deduct any expenses for meals.

Of coure this savings won't happen until that taxes are filed next spring.

  • IRS W2 withholdings are really re-calculated on a monthly basis? I don't know why that's so shocking... I guess I just expected a more accurate estimation of the annual income. Anyways, great answer. – Dacio Jun 30 '15 at 17:40
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The ways you might try to shelter it would be the same as for salary or other income: Max out your 401(k) or IRA or equivalent, and your HSA if you have one, and consider tax-free educational savings plans for your kids, and...

Getting paid more means getting taxed more. I find it easier to just ignore the pretax numbers entirely. My real salary is the post-tax amount; the difference was never mine in the first place. That doesn't mean I don't try to get some of it back when filing my taxes, but I budget my life based on what I know I'm keeping rather han on money I'll never see except on paper.

Two things are certain, and the one we're likely to beat first isn't taxes.

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