I got my bonus! Well, most of it anyway. After all taxes I ended up with barely more than 50% of the gross amount. For some reason I have been laboring under the false impression that there is a special tax bracket for bonuses. But after some research and this article at TheStreet.com, I realize that’s a myth (for federal taxes at least). Apparently some states also have a special tax on annual bonuses?
In short, the abnormally high amount of tax withheld is due to our tiered income tax system. For us as a married couple filing jointly in 2004, the first $14,300 of overall income is taxed at 10%, the amount between $14,300 and $58,100 at 15%, and the amount between $58,100 and $117,250 at 25% (I wish I could go higher). But the bonus is basically taken as being added on the very top, so it is taxed at (for us) 25% federally. Add in state, Social Security, and Medicare taxes, and that’s where it all goes. (Note that I am ignoring tax deductions like mortgage interest or the standard deduction.)
Still, of course the bonus is nice. I don’t have any plans for it, I am treating it like any other income just like Uncle Sam. That big screen I saw at Costco was nice, though… ahem. One thing I did notice was that nothing was taken out for my 401k. That’s a shame, since that means I am losing out on the company match for that part of my income. Hopefully this will help me get on track for my Mid-Term Goal!
Note: Tax stats taken from SaveWealth.com