Clawback Tax - One Person's Story

For going on two months, eFinancialCareers News has asked financial professionals to explain the impact on their own finances if the government (or an employer, presumably under pressure from the government) were to seize their most recent bonus payment. Jonathan Clements, a well-known personal finance author now employed by Citigroup, this week offered the kind of testimony we've been seeking.

In a Wall Street Journal opinion piece discussing the bonus clawback tax the House of Representatives approved last week, Clements writes, "Once my total income hits $250,000 for the current calendar year, I will have no incentive to work a single day more in 2009. After all, for every extra dollar of income I earn above $250,000, I will lose 90 cents of the bonus I received earlier this year."

Even after "finagling" the timing of personal investments and other income, he continues, "by mid-October, I will hit $250,000 in total income - and have no incentive to earn any more income in 2009. At that point, I plan to ask Citi for an unpaid sabbatical. Forget earning more income. There's no point. Instead, you will find me hunkered down at home, desperately trying not to spend money. This will make entire financial sense for the Clements household. What about the struggling economy? Not so much."

House Bill Fades, But Clawback is Likely

To be sure, that proposed 90 percent tax on last year's bonus income of bailed-out company employees whose families earn more than $250,000 appears less of a threat today than it did last Thursday. Since then, President Obama has said he wouldn't sign such a measure, and Senate leaders have indicated they intend to adopt a less draconian bonus tax.

But sighs of relief would be premature. The public rage that boiled over upon news of retention payments to AIG employees is far from satiated. So, some type of legislated, retroactive financial penalty against the bulk of Wall Street employees remains very much on the table, although its precise scope and severity are still up in the air.

Clements notes the House measure would punish many individuals like himself and his immediate colleagues at Citi, who were never involved with sub-prime mortgage products. Meanwhile, he observes, "many of the Wall Street executives responsible for today's mess have long since moved on - and, unless they receive a bonus in 2009, will escape the 90% surtax. Unfair? Indeed, it is."

He also points out such a steep tax could cause financial headaches for his colleagues who either spent their 2008 bonus or used it for retirement plan contributions. What's more, some of Clements' colleagues have total incomes that "don't come close to $250,000," but adding their spouse's salary and their investment income would nonetheless trigger the bonus tax.

Clements is director of financial guidance for myFi, a new Citicorp financial service aimed at the mass market. Before joining Citi in April 2008, he spent 18 years as The Wall Street Journal's widely respected personal-finance columnist.