How to Boost Your Cash Flow in Two Easy Steps!

No, this isn’t some intro to a multi-level marketing scheme.

If you are like a lot of people, you are probably getting a decent tax refund this year. Did you know that with some planning, you can actually have that money during the year instead of letting the government use it all year interest-free? Your goal should be to get the amount withheld from your paycheck as close as possible to your actual tax liability. That way, you get to use the extra cash throughout the year to fund your emergency fund, Roth IRA, 401(k) or anything else you might need.

Step 1: Fill out Form W-4 (PDF), which tells you how many Withholding Allowances you should be using. Or, if you prefer, the IRS also offers a Withholding Allowance Calculator. The form is pretty straight-forward so it shouldn’t pose any problems. Just follow the directions. Remember, if you itemize your deductions, you will need to fill out page 2 of Form W-4. Now, just because the form tells you can claim a certain number of allowances DOES NOT mean you have to. In fact, I would be conservative so that you don’t owe money at tax time.

Step 2: Once Form W-4 is filled out, it must be turned in to your Human Resources department so that they can start withholding the proper amount.

That’s it! Next time I’ll show you how your company figures out how much to withhold from your pay. It’s a pretty cool calculation and relatively easy once you get the hang of it.

15 thoughts on “How to Boost Your Cash Flow in Two Easy Steps!”

  1. Yeah, but getting people to buy into this concept, I’ve discovered, is practically impossible. I have a handful of acquaintances and coworkers who simply WILL NOT adjust their withholding in order to minimize the refund payable.

    And the IRS withholding calculator, while a nice tool, isn’t perfect. For someone like me who’s paid a monthly bonus as well as biweekly, its calculations leave a bit to be desired.

  2. I have a feeling my company underwitholds for me. I have a single allowance checked (for myself) and I’m consistently short to the tune of a few grand each year.

  3. The true art is to get it inside the 90% safe haven while still oweing money. If you owe them money, it’s like borrowing from the govt for 3+ months, tax free!

  4. My wife and I use our refunds to make big purchases, home improvements, etc. So it works like a forced savings program for us. If we had gotten the money throughout the year in our paychecks instead, we probably would not have saved the same amount. The extra $30 dollars a check would have gotten “pissed away” by eating out more or buying stuff that we don’t really need. I think most people lack the fiscal discipline to invest the extra dollars they would get from lower witholdings.

    As for the “interest free loan to the government” argument, what’s the alternative, putting it in a credit union savings account at 1% a year interest? You do the math. The forced savings aspect is worth more to me than $20 or $30 dollars of interest (that you have to pay taxes on). Of course, your mileage may vary . . .

  5. For us, we shoot for the 100% of last year’s tax safe harbor for my withholding, since my wife is self-employed and I’d rather do this than the dreaded “estimated tax payments”. We set aside 30% of her income in a “tax” savings account that is paying 4% interest at the moment, pay the extra taxes out of it, and regard the money left in it as our “refund” – which then goes into long-term savings.

  6. While under-withholding by the maximum allowed would be optimal, there are no penalties for over-withholding and there are penalties for under-withholding.

    So if your income is somewhat unpredictable, you’re probably better off erring on the side of caution, even if it means giving Uncle Sam a small tax-free loan.

  7. This argument is comical. The money you put in your pocket only comes out to a small amount per paycheck. I actually think it is better to government is able to make interest off the large amount of the combined withholdings of people and they can use that for government purposes. The government will only make a few hundred dollars off of each person at most…but that adds up on there end. Get over your idealistic ways!!!

  8. The 100% of last year’s taxes is completely predictable – just set up your W4 withholding to (last year’s taxes) / (n paychecks in year). Or, more usefully since you rarely know your taxes by then, when you do, calculate (last year’s taxes – total taxes paid so far) / (n paychecks left in year). Since we don’t do estimated tax payments on my wife’s income, I do zero W4 exemptions and “extra withholding” to hit this number. It may take a couple tries to get the number right and I do usually pay a bit more than absolutely needed to be safe…

    I’ll admit that for us, it’s easier than most since my W4 stuff can be changed online.

  9. Increase your cash flow by decreasing your withholdings.

    This site provides the easiest and most thorough applications to determine your proper paycheck withholdings.

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