General Motors (GM) just announced that off the back of 12.8 billion dollars in pretax profits the company will be paying each of its hourly employees a profit sharing checks of up to $11,750.
This is exciting news for the 50,000 UAW workers. These GM employees will receive the benefit as their share for the key role their production played to help generate GM’s revenue.
For most anyone $11,750 can have a significant effect on their lives and their tax return. Many of these employees will receive this money with little thought of the impending tax issues. Also, without a clear understanding or guidance to the multiple options they have to efficiently receive that money from a tax perspective.
So, if you are a GM employee receiving this benefit, how will this money affect you? What are your options when receiving this money?
First, it is important to understand how this money will affect you from a tax perspective. The $11,750 will be treated as “taxable income” to you. This means whatever your income will be for 2018 you will need to add that amount to get to your total income.
One option you have is to take the check and cash that money to be spent. Be mindful once you choose this option you will have to pay state and federal taxes on that money. You will also need to make sure that “extra income” for 2018 does not bump you into the next tax bracket. As an example, if you make $35,000 a year and you cash the $11,750-profit sharing check, assuming you file as an individual not jointly, your 2018 income will be 46,750, which will bump you from the 12% tax bracket to the 22% tax bracket. This means you will owe an extra 10% on any income about $38,701 in 2018. I have included below the 2018 tax brackets to reference.
The second option is you could deposit a portion of that money into a pre-tax retirement account like an IRA. This would “defer” the income tax you owe on that money. As an example, you can deposit $5,500 per year into an IRA or $6,500 per year if you are 50 years old or older. That money you deposited into an IRA may no longer be taxed, so if you put $5,500 of the $11,750-profit share check, you may only pay tax on $6,250. You may also be able to do a “spousal IRA” which would allow for you to put an extra $5,500 or $11,000 total of the $11,750 away only paying tax on $750. It is important to note the IRA strategy would also be available as a Roth IRA strategy. For more on Roth IRA see https://www.fsgmichigan.com/2016/05/23/roth-iras/ . Additionally, you may be able to defer a portion or all of the profit sharing check into your Personal Savings Plan (PSP).
The third option would be to do a hybrid or combination of the above strategies to allow for extra monies to enjoy now and monies for your retirement, all while efficiently reducing your tax liability.
Depending on you, your family and your objectives and goals there are many options for this great benefit you will receive. An amount of money like this would provide a significant change for most people, but don’t let the excitement get in the way of making good decisions that maximizes these dollars for you and your family. For many of you this will be the first time anything like this has happened for you. Which is why it is important to have someone who can clearly educate, lay out and tailor these options to fit your unique and specific situation.
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This article was written by Ronald Thompson II and Brice Carter.