As the calendar year comes to a close, you may be in the process of reviewing your financial situation. This may include a review of year-end bonuses or the receipt of company stock through options, RSUs, or other types of equity compensation.
While these important financial windfalls can create new investment opportunities, they can also raise important tax and planning questions. Since no one wants to write a big check to the IRS on April 15th, now is the time to review your tax plan for 2025 income.
With a team of CFP® professionals in Birmingham, AL, the BCR Wealth Strategies team specializes in helping successful high-income earners develop year-end tax planning strategies.
In our blog, we’ll explore some of the most frequently asked questions about year-end cash bonuses and equity compensation:
- How should I plan for taxes on my year-end bonus?
- Should I consider an 83(b) election for company stock?
- How do bonuses and equity compensation impact my overall financial plan?
- What happens if my withholding is not enough?
- How can I use year-end compensation to strengthen my investment strategy?
Why Year-End Planning Matters
Year-end planning for bonuses and equity compensation is not simply about taxes; it’s about how these financial events fit into your long-term financial plan. Whether you’re weighing an 83(b) election, adjusting your withholding, or deciding how to allocate a year-end bonus, each decision influences your cash flow, taxes, and investment strategy.
At BCR Wealth Strategies, we provide comprehensive financial planning and wealth management services in Birmingham, AL, to professionals, executives, retirees, and business owners navigating complex financial situations.
Our Birmingham financial advisors will work closely with you to review your unique circumstances, identify the most suitable options, and coordinate effective strategies across investments, taxes, and estate planning considerations:
- Withholding matters. Review whether your bonus has adequate tax withholding and consider safe harbor rules.
- Equity compensation is complex. Decisions like 83(b) elections require careful consideration within a short timeframe.
- Integration is critical. Bonuses and equity should be aligned with your overall financial planning in Birmingham, AL.
- Diversification is key. Stock-based compensation can increase concentration risk, making ongoing portfolio reviews more necessary.
Watch our video on smart tax investing strategies.
Q1: How should I plan for taxes on my year-end bonus?
One of the first questions people ask is: “What happens to my taxes when I receive a year-end bonus in cash?”
Bonuses are taxed as ordinary income, which means they are subject to federal and state taxes, as well as Social Security and Medicare taxes.
In many cases, employers withhold at a flat supplemental wage rate, which may or may not match your actual marginal tax bracket. If your withholding is too low, you could owe substantial amounts of additional taxes when you file. On the other hand, over-withholding could tie up cash you prefer to invest as soon as possible.
It’s essential to review your withholding levels before year-end, as they can significantly impact your tax liability come April 15. Aligning your withholdings with safe harbor rules can also help you avoid underpayment penalties.
A financial advisor in Birmingham can work with your tax professional to evaluate your situation and determine if making an estimated payment or adjusting withholding rates makes sense.
Q2: Should I consider an 83(b) election for company stock?
Another highly searched question is: “Do I need to file an 83(b) election when I receive shares of stock from my company?”
Filing an 83(b) election means you recognize income based on the stock’s fair market value at the time of the grant, and not based on a vesting schedule.
This strategy can be appealing if the stock is granted at a low valuation and you anticipate substantial future growth. By making this election, future appreciation is generally taxed as a capital gain, rather than ordinary income, which is taxed at a higher rate for larger incomes.
However, there are risks. If the stock decreases in value or never truly vests, you’ve paid tax on income that may never happen. Additionally, you must file the election within 60 days of the grant date, because there are no extensions.
At BCR Wealth Strategies, we can help you evaluate whether an 83(b) election aligns with your broader investment management strategy in Birmingham, AL. Equity compensation decisions are rarely one-size-fits-all, so understanding both the potential benefits and drawbacks is essential for each unique situation.
Q3: How do bonuses and equity compensation impact my overall financial plan?
A common question at year-end is: “How do these additional sources of income affect my overall financial plan?”
Bonuses and equity compensation can change your taxable income for the year, potentially impacting deductions, credits, or even your eligibility for certain retirement contributions.
They can also affect how you allocate cash flow toward savings accounts, investment portfolios, and debt reduction. For example:
- A cash bonus could provide an opportunity to contribute more to retirement savings accounts.
- Stock compensation may concentrate your wealth in your employer’s stock, raising questions about exposure to investment risk.
- Additional income may shift you into a higher marginal tax bracket, changing the way you think about charitable giving or tax-loss harvesting.
Consider working with a financial planner in Birmingham, AL, such as BCR Wealth Strategies, to help you integrate these fluctuating pieces into a cohesive financial strategy. Our role is to review the ripple effects of cash bonuses and equity compensation on your tax, estate, and investment plans, ensuring that decisions align with your long-term goals and risk tolerance.
Q4: What happens if my withholding is not enough?
Another frequent concern is: “What if my employer doesn’t withhold enough tax from my bonus?”
If your withholding is insufficient, you may face a larger-than-expected tax bill on April 15th. The IRS requires taxpayers to pay a minimum percentage of their current or prior year’s tax liability throughout the year to avoid penalties.
That’s why planning before December 31 is so important!
Adjusting withholding, making a year-end estimated tax payment, or timing certain deductions may help balance your liability. This is often an area where wealth management advice proves invaluable. It’s not just about avoiding penalties, but also about coordinating your household’s current and future cash flow.
Q5: How can I use year-end compensation to strengthen my current investment strategy?
The final question many investors ask is: “How should I put this additional money to work?”
Year-end bonuses and stock compensation can provide opportunities to:
- Increase contributions to retirement accounts if you haven’t reached the annual limit.
- Add to taxable investment accounts with a focus on tax efficiency.
- Pay down high-interest debt.
- Build a more diversified portfolio if equity compensation leaves you more heavily concentrated in your employer’s stock.
Our investment management services in Birmingham, AL, integrate these opportunities with your broader financial plan. Our approach includes evaluating tax-efficient vehicles, aligning investments with your risk tolerance, and determining the optimal timing for an equity sale.
Moving Forward with BCR Wealth Strategies
If you’re receiving a year-end cash or stock bonus, thoughtful tax planning now can set you up for better financial decisions in the future. BCR Wealth Strategies offers financial planning, investment management, and wealth-related services in Birmingham, AL, that tie all these pieces together into one optimized strategy.
Contact us to schedule an introductory conversation about how your year-end compensation can be incorporated into your long-term plan.
