Year-End Bonuses: $1 Million or $800 or Nothing?
New York State Comptroller Alan Hevesi predicted in Time magazine that the extra income would bring $1.5 billion in tax revenue to the state. Bankers and traders got the biggest bonuses, of $1 million and up. The average Wall Street bonus is $125,500.
Most people expect far less, if anything. American workers who responded to a Salary.com 2005 Holiday Spending Survey said they expected to receive a bonus of about $800 and would use some of it to buy gifts. According to the survey of 1,000 Salary.com members, 58.3 percent do not expect to receive any holiday bonus.
Stockholders aren't doing nearly as well as the Wall Street heavy hitters or high-flying CEOs in corporate America. Brandon Rees of the AFL-CIO, which represents millions of union workers, told the Charlotte-Observer that CEOs in 2004 earned 431 times what workers averaged, which is up from 85 times in 1990.
In 2005, the average diversified stock fund returned 6.7 percent; bond investors gained less than 1 percent, and the average stock rose just 3 percent, according to market tracker Lipper.
A Christmas bonus may lighten the burden of a poorly performing stock portfolio. Remember, however, that bonuses and awards are shown as wages on your Form W-2, the IRS says.
A few things to consider. TurboTax Online says that if you didn't receive your bonus in 2005, but are receiving it at the start of this year, that may be a good thing. Deferring income makes sense for those who will be in the same or lower tax bracket for 2006.
In addition, a year-end bonus could raise your adjusted gross income so that you are no longer eligible for a particular deduction. H&R Block advises taxpayers to keep a sharp eye on your adjusted gross income to see if you are eligible for certain tax credits. Say you are single, earn $50,000 and are repaying a student loan. If you get a $2,000 year-end bonus, you lose part of your deduction for student loan interest.
The withholding amount on your W-4 assumes you will be working at the same salary all year. If your salary goes up or down dramatically, adjust your withholding so you don't have to pay at tax time, H&R Block advises.
The best year-end bonus may not be money, but time. According to a study commissioned by Research firm Harris Interactive and Stamford, Conn.-based MeadWestvaco Corp., which makes scheduling and planning products., about 75 percent of employed U.S. adults would be "interested" or "very interested" in receiving a year-end bonus payment in extra vacation days. The study said more than half would be interested in taking the bonus days as flex time.