Video: Are Bonuses Included in Adjusted Gross Income? (2024)

Video transcript:

Hello, I’m Scott from TurboTax, with important news for taxpayers who receive bonuses from their employer.

You may be wondering if the bonus you receive at work is subject to special tax treatment. Unfortunately it isn’t, and you must include your bonuses on your tax return. This will inevitably increase your adjusted gross income, or AGI—which can potentially increase the amount of tax you owe.

When your employer provides you with a bonus, they will report it on your W-2 in box 1—but it’s combined with your normal wages or salary. In the eyes of the Internal Revenue Service, your bonus is no different than the salary you receive. And if your employer doesn’t give you a bonus in cash, they will still report the fair market value of it on the W-2.

For example, if your company rewards you for your dedication with a free vacation, your W-2 will reflect the cost of your airline ticket, hotel and all other expenses your vacation covers. Just like a cash bonus, these amounts get added to your normal wages or salary.

There are other implications to reporting a larger AGI that can affect your tax return. If you itemize deductions and report some expenses that must be reduced by a percentage of your AGI, the larger your AGI is, the lower your itemized deductions will be. In addition, a larger AGI can potentially make you ineligible to take certain deductions or force you to take less than the maximum deduction that’s available to taxpayers with lower incomes.

And lastly, the higher your AGI is, the more difficult it may become to qualify for tax credits.

One last thing to remember is that your employer must withhold taxes on your bonuses just like they do for your salary. So when you receive your W-2, it will report the total amount of federal tax you paid through withholding—which you will report on your return to reduce the amount of your outstanding tax bill.