I’m a CPA: 4 Tax Moves To Make When You Get a Promotion
Written by
Laura Bogart
Edited by
Kristen Mae
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After a lot of hard work and long hours, you’ve finally earned the title you want on your business card — and the salary to go with it. There are plenty of money moves you want to make, some more exciting than others. You might want to funnel extra cash into your emergency fund or debt repayment plans. And yes, you may also be thinking about putting some aside for a fancy vacation. In your excitement, you’re probably not thinking about taxes.
You should be. If your promotion comes with a new paycheck that pushes you into a higher tax bracket, you’ll need to make some changes to your tax documents. Some of these changes you can handle on your own, while others may require you to sit down with a tax professional. Either way, the time to start planning is as soon as you’ve finished celebrating.
Update Your Paperwork
Once you leave your boss’ office after getting the good news, your next stop should be your company’s HR or payroll departments. After some brief congratulations, it’s time to update key tax documents, like your W-4. Is it tempting to temporarily keep your tax withholdings based on your old salary? Maybe. But it’s not worth the hit of being penalized for insufficient tax withholdings when tax season arrives.
You’ll also want to make sure you’re not withholding too much, which could mean giving the IRS an interest-free loan instead of putting that money to work for you. You could use the extra income to pay down debt, contribute more to retirement, or invest.
Focus on Core Savings Goals
With a larger salary, you have more flexibility — but you’ve got to have a plan. According to Rob Burnette, investment advisor representative and professional tax preparer at Outlook Financial Center, that plan should include allocating extra money to debt reduction, retirement contributions, and lifestyle — in that order of importance.
Paying off debt as soon as possible is essential, not only for boosting your credit score and reaching financial milestones, but for freeing up more money in general.
“With current interest rates, consumer debt reduction and staying out of that kind of debt can be a huge pay raise by itself,” Burnette said. “Dedicate at least 50 to 70% to [debt], then 15% to retirement and the rest of the balance to lifestyle.”
Investigate Work-Related Tax Deductions
Now that you’ve gotten a promotion, you know there’s a pathway for even more career advancement. That might mean attending an industry conference or joining a professional organization in your field.
If you’ve wanted to attend career-building events but held off because your company doesn’t reimburse attendance fees or membership dues, you may be able to claim a tax deduction for some work-related expenses.
Time to put in that panel proposal or send an email to the head of that professional association’s local chapter. What better way to keep climbing the ladder to your next rung of income while finding potential tax write-offs in the here and now?
Work with a Professional
Sorting out your tax situation with a new income can be tricky, particularly when you’re trying to balance taxes within your overall plan for financial growth. Consulting an expert is a wise move, and Burnette recommends working with a fiduciary who understands the intersection of taxes, investments, and financial planning and can give you a holistic picture.
“Work with an investment and financial planning professional who understands and is trained in relevant tax considerations to craft a plan going forward,” he said.
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