As we ring in the new year, there’s much to look back on. Through waves of the pandemic, adhering to different mandates and changes, and persevering through any personal struggles, we all deserve to close out 2021 with a celebration. For many companies, that means rewarding their employees with year-end bonuses. But, if you incur a sudden income of cash, what should you do with it? Many options put that money towards furthering your financial goals and starting the next year on a productive note.
For the most part, there are many uses you can put your bonus check towards that are tax strategies, minimizing the taxes you’ll have to pay on your bonus. In some, you can reduce your gross income. In others, you can increase the tax deductions that apply to your income. Here are ways you can use your bonus that may benefit you financially:
Donating
Not only would you be contributing to a good cause and giving back to those in need, but donating some or all of your bonus would allow you to receive a tax deduction on it. Many qualifying charities include nonprofits promoting literacy, education, amateur athletics, religious charities, and more, so you’ll be able to choose a cause that fits your interests best.
Contribute to 401k
One possible way to minimize taxes on your bonus is to reduce your gross income. This can be achieved by allocating this income to a tax-deferred retirement account — either a 401(k) or an individual retirement account (IRA). The amount you put in can reduce your overall taxable income, possibly reducing your annual tax liability. If you’re not sure which retirement account is best for you, one of our Utah retirement plan experts can help.
Defer Compensation
You might be able to save on annual taxes by asking your employer to delay your bonus payout until January of the new year. If your year-end bonus pushes your income into a higher tax bracket this year, then this strategy could help you save some extra money.
Pay Medical Expenses
If you itemize deductions, you may be qualified to reduce taxes on your bonus by using it to pay for any medical or dental bills that weren’t reimbursed by your insurance.
Work With a Trusted Advisor
Ultimately, if you expect to receive a year-end bonus, working with a trusted financial advisor can help you outline the best option for you to allow your bonus to work towards your financial well-being and minimize the taxes you’ll have to pay on it.
At TrueNorth Wealth, our goal is to make sure you achieve yours. We offer holistic financial and retirement planning services that will work with your circumstance to find the most optimal way to accomplish financial security in the long run.
To learn more or schedule a no-cost consultation with a fee-only financial advisor in Boise, ID, or throughout various locations in Utah, call or book an appointment online today.
