Dear Liz: You recently answered a question from someone who wondered whether to pay off tax debt or credit cards with a $10,000 bonus. You asked why the person planned to put only about half the bonus toward debt instead of all of it. I think I know the answer. A bonus is considered taxable income, so someone in a high tax bracket likely would net only about half of the gross amount.
Answer: That’s a good point. Many people fail to factor in the tax bite when they get a windfall or cash in a retirement plan. The more money you make, the more painful that bite can be.