@YadavShradha18 wrote:
Thank you OPUS 17. One last question.
So when I file 2023 tax return I will follow one of the two methods mentioned by you. Will I be able to get all my deducted tax on bonus back in 2023? it was more than $3000.
More or less, yes, but it's based on your income and your tax. Withholding is only an estimate, and it might have been high or low to begin with, and that will affect whether the numbers line up exactly correctly.
The tax on a $25,000 bonus would be anywhere from $3750 to $9000, depending on your other income, and the mandatory withholding should have been 25%, or $6250, not $3000, so the numbers already don't quite line up.
Very briefly, supposing you report $100,000 of income in 2022, that includes the bonus, and your federal income tax is $20,000 (form 1040 line 24) is $18,000. You would recalculate your 2022 tax return as if the bonus was not paid ($75,000 of income). Maybe the tax on that is $13,000. That $5000 difference is the credit you can claim on your 2023 return, which will come back to you as a refund assuming your other taxes, withholding and credits are mostly balanced. The amount of the extra refund in 2023 might or might not be the same as the extra tax you paid in 2022 or the extra withholding, because there are a lot of moving pieces that all have to work together. But the point is that with Method 2, whatever extra tax you paid in 2022 is treated as a credit in 2023.
