Why is my tax refund less than the taxes I paid for a sign-on bonus within the same year?

[TomK2023]

We do not have access to your tax return; we can not see your unique inputs.  With that in mind:

• If your employer issues you a stand-alone bonus check, your bonus will be subject to the 22% withholding flat rate if it is $1 million or less for 2022.
• Bonuses can be subject to state income taxes as well. These tax rates vary by state.
• You may have to pay the 1.45% Medicare tax on your bonus plus the 6.2% Social Security tax on the amount of your wages, including your bonus, that is below the $147,000 Social Security cap (tax year 2022).

[ladydebs85]

This is the scenario...

My husband paid back the sign-on bonus of 5K within the same year he received the bonus, which included about $1,400 in taxes. He received his W2 which first did not include the payback within the same year and we just received the corrected W2 and when entering the new numbers our refund only went up $300 instead of the $1,400 that he paid last year. Why isn't he getting back the same amount he paid back in taxes?

[DMarkM1 · Accepted solution]

Yes, there could be a couple of things that cause that difference.  First, the US tax system is progressive and marginal.  That means only the income that falls in the tax bracket level is taxed at that percentage.  Also, withholding for a bonus is typically 22%.  The change in tax is based on the tax bracket the income is in.  So even though you paid in at 22%, if your taxable income is in the 12% bracket that is what the change will be.  Here is an example.

First, here is an excerpt from the 2022 tax brackets. 

Income                                                        Tax

Not over $20,550                                       10% of the taxable income

Over $20,550 but not over $83,550        $2,055 plus 12% of the excess over $20,550

Assume your taxable income was 80,000 with a bonus of 6,400.   The tax would be 2055 plus 7134 = 9189   Assume you paid in 10,589 withholding.  Your refund would be 1400.

Once you gave the bonus back your income became 73,600 and the tax on that is 2055 + 6366 = 8421.

Withholding is still 10,589 so your refund is now 2168; the refund difference is 768 (which is 12% of 6400).  Even though withholding for a bonus at 22% is 1408.  

Additionally, your income level also affects the amount of some credits which may have been reduce at the lower income levels.  

You should look at the forms to see what is actually happening with the changes.  To view your forms in online versions use the steps below.  For desktop versions use the "Forms Mode."  LInes 15 - 33 are where you can find the tax and credit changes with and without the corrected W2.  

1. Select "Tax Tools" in the left hand menu
2. Select "Tools"
3. Select "View Tax Summary"
4. Select "Preview My 1040" in the left hand menu

[ladydebs85]

Thank you very much for the detailed information provided. This just seems super unfair given that he paid money back he never received (tax portion of the bonus) and then he will not get back the tax money he paid - so we basically do the right thing in paying back the tax portion of the bonus and in return we get nothing back that was actually mine. It just does not add up. We were under the impression to get back the exact amount in taxes that was paid back.