How to Reduce Tax on Your Bonus — 6 Legal Strategies

You can't make your bonus tax-free — the IRS treats it as ordinary income. But you can legally reduce the tax bite through timing, retirement contributions, and deduction strategies. These six approaches can save you hundreds to thousands on a significant bonus.

See exactly how much you'll take home with the Bonus Tax Calculator.

6 Strategies to Keep More of Your Bonus

Strategy	Potential Savings	Effort
Max out 401(k) contributions	$2,000–$8,000+	Medium
Contribute to HSA	$500–$1,500	Low
Defer the bonus to January	Defers tax liability one year	Low (if employer allows)
Increase charitable giving	Varies	Medium
Harvest investment losses	Varies	Medium
Adjust W-4 withholding	Cash flow improvement	Low

Strategy 1: Max Out Your 401(k) ($2,000–$8,000+ savings)

If you haven't maxed out your 401(k) for the year, increase your contribution rate before the bonus hits. The 2026 limit is $23,500 ($31,000 if you're 50+).

Example: Your bonus is $15,000. You increase your 401(k) deferral to 100% for that paycheck (many plans allow this). The entire $15,000 goes into your 401(k) pre-tax. If you're in the 24% federal bracket plus 5% state, that saves you:

Tax	Rate	Savings
Federal income tax	24%	$3,600
State income tax	5%	$750
Total tax savings		$4,350

You don't avoid the tax forever — you pay it when you withdraw in retirement. But you avoid paying it now at your current (potentially higher) rate.

Strategy 2: HSA Contribution ($500–$1,500 savings)

If you have a high-deductible health plan, contribute the bonus to your HSA. The 2026 limit is $4,300 (individual) or $8,550 (family). HSA contributions are triple tax-advantaged:

Reduces taxable income now
Grows tax-free
Withdrawals for medical expenses are tax-free

Strategy 3: Defer to January

If your employer offers flexibility on bonus timing, deferring a December bonus to January pushes the income into the next tax year. This is especially valuable if:

You expect to be in a lower bracket next year (job change, partial retirement)
You've already maxed out retirement contributions for the current year
You want an extra year of investment growth before paying the tax

Not all employers offer this option — check with HR before year-end.

Strategy 4: Increase Charitable Giving

If you itemize deductions, charitable contributions reduce your taxable income. Donating appreciated stock is even more effective: you get the deduction for the full market value and avoid capital gains tax on the appreciation.

Example: You receive a $20,000 bonus and donate $5,000 of appreciated stock (cost basis $2,000). You get:

$5,000 charitable deduction (saves ~$1,450 in a 29% combined rate)
$0 capital gains tax on $3,000 gain (saves ~$450)
Total tax benefit: ~$1,900

Strategy 5: Tax-Loss Harvesting

If you have investments with unrealized losses, sell them before year-end to offset income from your bonus. You can deduct up to $3,000 in net capital losses against ordinary income (including bonuses) per year.

Strategy 6: Adjust W-4 Withholding

This doesn't reduce your tax — but it fixes the cash flow problem. If you know you'll over-withhold after the 22% bonus withholding (because you're in a lower bracket), adjust your W-4 to reduce withholding on regular paychecks. This gives you more take-home pay throughout the year instead of waiting for a refund.

For understanding how the two withholding methods work, see Aggregate vs Percentage Method. For sign-on bonus specifics, read Are Sign-On Bonuses Taxed?. And for the big picture, check How Bonuses Are Taxed in 2026.