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Bank Bonuses May Come Early

Editor's note: The story has been updated to clarify a detail regarding compensation treatment under a higher tax rate.

NEW YORK ( TheStreet) -- As bonus season approaches, Wall Street may time payouts to avoid a possible tax increase in the New Year.

"Bush-era" tax provisions that benefitted the wealthy are set to expire at the end of 2010. If Congress doesn't extend the favorable rates through next year, it could make a big difference whether employees at Wall Street behemoths like Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Bank of America (BAC), Citigroup (C) and the like earn their income by year-end.

Some big banks pay bonuses before year-end, while others delay the holiday gift til early January. However, the sunset of a Bush-era tax break may cause them to award compensation in 2010. "Executives are thinking about deferred compensation choices -- deferring bonuses and income, which they can choose to do," says Greg Rosica, a tax partner at Ernst & Young. "People who have stock options are considering the strategy with that. At companies paying out bonuses, early January vs. December can be a very different tax situation for the recipients."

The Obama administration and most of its Democratic peers in Congress favor an approach that would extend tax cuts for the middle-class, but allow rates to rise for top earners. That would mean any individual earning more than $200,000 a year or any family earning more than $250,000 a year will pay a rate of nearly 40% in 2011, rather than the current 35%.

For someone earning $500,000 - the average compensation of a Goldman Sachs employee last year - that's at least at least a $150,000 tax hit on income alone, not including deductions or other potential tax hikes on the horizon. For executives and star traders who earn millions of dollars a year, the hike has an even greater impact.

Additonally, a Mercer study performed for TheStreet shows that top banks shifted more compensation into "long-term" incentives like options and restricted stock. It was a move that came at the urging of corporate-governance experts and mirrored what the Obama administration's pay czar, Kenneth Feinberg, was pushing large financial firms like American International Group (AIG) to do.

Yet tax rates on capital gains from cashing in those types of compensation stand to more than double for top earners. If and when the tax policies implemented by President Bush expire, cap-gains rates will move from 15% to the taxpayer's current income tax rate - in other words, potentially 39.6% in 2011, and 40.5% in the coming years.

Wall Street has shown that it's willing to shift pay-out dates to benefit its employees: Merrill Lynch management decided to dole out billions of dollars in bonuses at the end of 2008, days before the troubled investment bank collapsed into Bank of America's arms. So, perhaps bankers and traders may get at least one last year of relatively low tax rates if bank managers decide to pay bonuses in 2010.
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