Here's an email I recently received from a reader:
I'm anxiously waiting to get my tax documents so I can work on my return. Last year I nailed my withholding estimates - we got a small fed refund and owed a bit for our state return. The net was that we underpayed by ~ $150. I'm expecting a refund this year though because last year, for the first time in ages, I received a bonus. My company pays the bonus in Q1 for achievement in the prior year. I don't like getting a refund - how can I best account for this event in tax planning in 2014?
The bonus comes as payment with your regular check. If I know the expected bonus amount, should I adjust my W-4 before that paycheck or should I recalculate my withholding for the rest of the year after I get that check? How have others handled this situation?
Based on the tax withholding it looks like I was taxed last year on that check at ~ 37%. I figured out that the additional amount in the check resulted in ~ $2000 of additional withholding vs. what I would have had withheld if those bonus dollars had withholding equal to what was withheld on a regular paycheck around the same timeframe.
What's your advice for him?