I receive a sign-on bonus in December 2016 in the US. My income in 2016 is way higher than in 2017 due to one-time income. If my employer takes back the sign-on bonus paid last December, and gives it back to me this year, will the bonus be taxed in a different tax bracket?
It is unlikely that the IRS would allow this. It is in violation of the constructive receipts doctrine.
Most employee taxpayers only faced this problem if their employer offered PTO buy-back programs, but effectively the moment PTO became eligible for buy-back it had to be counted as gross income on the W-2, whether employees initiated the buy-back at that point or not. For these reason a lot of employers stopped offering PTO buy-back programs.
The point of the constructive receipts doctrine is that the moment you are eligible for payment, you are then liable for taxes on that payment whether you receive the payment now or later.
If before you started work at this company you arranged to have your bonus be contingent on completing your first year of employment, then it would no longer be a signing bonus, but you wouldn't have it counting against your 2016 income taxes.
Barring rules about when money is considered taxable and considering only practicality. When your employer cuts a check to you there are taxes and other things withheld from it. Those amounts are held in trust until they're reported and remitted out to the respective authorities to which they're due. Later those amounts are all summed up for the year and included on your W2 which is reported to the IRS and furnished out to you.
Even if your employer wanted to do you this favor, money has already been paid and reported to state and federal tax boards and employment departments. A W2 already exists indicating payment.
The only way this could be feasible (though still not really legal) is if you requested your bonus be paid to you in the following year before the check was cut. Once it's out in the wild there is too much proof that it exists and therefore way too much risk of an audit to make a change. There is a huge risk of audit to yourself and to your employer all so you can save maybe a couple of percent on a large one time payment. No sane employer would agree to this.
Seriously doubt it. And if yes, you are not going to like it. I was overpaid two months salary on December 31st one year. Could not get it straightened out before the end of the day. When I had paid the money back to said employer and received a corrected W-2, my employment earning had not been decreased.
Looking into why, in the US, individuals are taxed based on cash basis. Since I received money on December 31, it counted as income for that year. The amount I paid back could be used to lower the following years taxes, with various restrictions and much paperwork. (Those restrictions are such that lower income people overpaid in one year returning the money the next are screwed and will never see their tax money back. angry face)
Barring lying, which is not good. It seems the steps would be:
- Received bonus in December 2016.
- Bonus rescinded and you pay it back in 2017.
- Receive your bonus again in 2017
- Corrected W-2 with corrections to SSI and Medicare taxable income and withholding.
- You pay 2016 taxes, as if you were paid the bonus in 2016.
- You file to recapture that tax money in 2017.
Let's assume at step 1, for round numbers, the bonus was $100,000. Also assume that you did not exceed SSI withholding limits so about $6,000 will be taken out. Further, assume $20,000 withheld for income tax. Net pay is $74,000
At step 2, because the bonus is still taxable, there is going to be no recapture of the income tax withholding IIRC. Your employer will need to be paid back $94,000.
At step 3, you have received a taxable bonus, the same withholdings will likely apply, for a net pay of $74,000. Now uncle Sam has $40,000 instead of $20,000, and you can't get that back until you file. (You could jiggle numbers on W-4 and try to get it back piece by piece.)
Step 6 involves (Or did a few years ago) preparing three tax returns. There are two separate ways of doing the 2017 return. One is to itemized the wage repayment, the other is a credit of the overpaid taxes in 2016. So one prepares two tax returns to see which results in the lower taxes. To calculate tax over payment, a 2016 return with the wage repayment subtracted from the wages on the W-2 needs to be prepared, and then the tax due on that return is subtracted from taxes paid in 2016 to figure the tax credit for preparing the 2017 return using the tax credit method.
All this assumes the IRS doesn't find out and decide there was no reason for all that except tax avoidance and finds a book to throw at you.
- Run the numbers.
- Consider the hassle factor.
- Maybe check with a tax professional.
- Consider how, "I want to cheat, but not cheat on taxes, and I want your help Mr. Employer", is going to play with your employer.