Several year end questions

[JenMO]

I have one client that receives a year end bonus from her employer. Does she have to have 20% withheld on fed income tax? or could she average it out. 20% will be too much tax and she will get a refund. Will IRS catch the bonus if we don't withhold 20%?
Also I read some advice about getting clients to consider selling for preferential cap gains treatment this year. 2008 capial gains treatment is the same - 0% in the lower tax brackets. Is Obama going to change this? I did some next year tax planning with the 0% in consideration. What is the opinion of what might happen?

[erchess]

My Two Cents

Regarding the withholding I believe that 20% is required to be withheld from every bonus but perhaps someone who knows more will contradict me. I do not have a cite and I do not do payroll. Will you be doing the payroll for the employer firm?

Regarding future predictions I personally do not think the new administration will change things much for 2009 but I could be wrong which is why I do not make any pretense of doing tax planning for clients except for those who write out their assumptions as to what the economy and the government will do during the period covered.

[Nashville]

Unprofessional Answer

JenMo, I'm sure there is an "official" requirement, probably a choice between

1) 20% of the bonus, or
2) the amount required to "level" out the withholding requirement for the entirety of 2008. You can find this on Table E-1, page 25 in Publication 15-A. Simply take his YTD wages (after bonus) and annualize the withholding requirement by multiplying the Table E1 requirements by 365. Then subtract his prior YTD withheld tax (prior to the bonus) from the annual requirement, and [poof!] this would be the proper amount to withhold.

I believe IRS would accept either of the methods above.

For those of us who have been around awhile, we would not be terribly concerned if we were convinced the taxpayer would have a refund. If we think IRS has an electronic means of detecting underwithholding on a single pay period, we are giving them way too much credit.

This response would not appeal to the "purists" among us, but if you do want to do this "by the book" you have two acceptable methods above.

As far as our president-elect, I wouldn't expect anything until I saw it. There is no way he can bring about his campaign promises, at least not that soon. He will not be in a position to do ANYTHING about 2008 unless he wants to pass legislation in the middle of the tax filing season, and that would be political suicide. Would take more than an Act of Congress -- more like an Act of God.

"We can only have one President at a time" - Ron Jordan (among others)

[DTS]

Also I read some advice about getting clients to consider selling for preferential cap gains treatment this year. 2008 capial gains treatment is the same - 0% in the lower tax brackets. Is Obama going to change this? I did some next year tax planning with the 0% in consideration. What is the opinion of what might happen?

Jen,

Lots of hints, suggestions. I don't believe anything is set in stone, yet. Talk is that all those tax increases will not happen for now, Bush's tax cuts, cap gains will remain as is for now. However, it just a guess at this point. We'll know after Jan. 20.

D