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A Little Self-Discipline Can Save You Some Money
By JLP | February 6, 2007
Lots of people like to get tax refunds each year. There’s something pleasant about receiving a nice lump sum all at once. I liken tax refunds to parents taking their kid’s money from them and giving it back later without interest. That’s exactly what the IRS is doing when you get a tax refund. A tax refund is exactly that: a REFUND. A refund of YOUR money.
With a little effort on your part, you could make some adjustments to your W-4 (PDF), which would allow you to keep more of your money throughout the year. It’s quite simple to fill out the form, just follow the instructions. You will then need to turn the form into your human resources department so that they can make the changes to your check. You could then deposit that extra money into your IRA or a savings account and earn interest on through out the year instead letting the U.S. government hold it for you.
Now, keep in mind that adjusting your W-4 is NOT without risks. If you claim too many allowances, you won’t have enough withheld from your check, leaving you with a shortfall and you’ll have taxes due when you file. So, you would be smart to be conservative with your numbers when filling out your W-4. Your goal should be to get your withholding as close to the amount you owe without requiring you to pay in when you file your taxes.
How much could this save you in a year?
The answer depends on how much you usually get as a tax refund. If you normally get a $2,000 tax refund, you could adjust your withholding so that you could get an additional $167 per month in take-home pay. If you deposited that amount into a high-yield saving account that paid 5% annually, you would have around $2,050 in a year’s time. (Of course you’ll have to include your $50 in interest on your taxes). No, it’s not a lot but $50 is $50. You can run the numbers yourself by downloading this Excel Spreadsheet I put together. You could have even more if you deposited your savings into an IRA, which is sheltered from taxes.
Related: Increase Your Cash Flow in Two Easy Steps!
Topics: Budgeting, Tax Planning, Taxes | 7 Comments »
February 6th, 2007 at 12:53 pm
I agree completely with this. I would rather have my paycheck increased every pay period then receive a big check at the end of the year. My ideal would be to receive a $500 or less refund after filing my taxes.
Be careful making too drastic of a change. I did this a few years back expecting to either receive a couple hundred dollar refund or owe a few hundred dollars. Well, I apparently miscalculated and ended up owing a few thousand plus penalties. I did a knee-jerk reaction and put my exemptions back to what they were and let the year ride out.
Since then, I have been slowing adjusting my exemptions. I am still receiving way too much back each year. Each year I increase the exemptions/allowances one or two and see what my refund is.
Also remember if you have a change during the year that will effect your deductions, you will need to submit another W4 lowering your allowances otherwise you may end up owing taxes and penalties!
February 6th, 2007 at 1:38 pm
The key to your idea is the self discipline part of it. Most people will get another $50 dollars in their paycheck and it will disappear and they will never know where it went. I consider myself fairly disciplined when it comes to finances, but think I would probably do the same thing. That is why I prefer to get a big refund.
February 6th, 2007 at 2:01 pm
I agree with sam.
The financially smart thing to do is as you suggest.
Unfortunately the tax refund is the only type of “saving” many people do. And getting the money in a big lump sum has a better chance of paying off debts than the smaller amounts.
February 6th, 2007 at 8:41 pm
I agree with the tip JLP provided. I’ve been doing this for many years and it works great. You can use the IRS Department of Revenue Withholding Calculator here,
http://www.irs.gov/individuals/page/0,,id=14806,00.html
or http://www.dinkytown.net/java/Tax1040.html
However my favorite is this one. http://www.paycheckcity.com/netpaycalc/netpaycalculator.asp
It allows you to enter additional federal allowances, to see what effect it will have on your paycheck. The best thing to do first is enter the information as you’d file. Then get write down the amounts. Then goto the IRS Calculator enter the same information and find out what you’ll actually be required to pay. The government intentionally makes people over pay.
Example: Income: $25,000 according to PayCheckCity they’d take out $94.96 bi-weekly. That’s be a total of 26 paychecks x $94.96. Which means I’d pay approximately $2458.96. When the IRS Calculator says I should have only paid $1506. That’s a total of $952.96 I over paid. That’d be nice to have to pay for things like utility bills.
So now that I know that. I can go back to Paycheck City and do some adjustment to the number of allowances I’d put on my W-4. I increased my allowances to 3. Which makes the Fed taking out $55.73 bi-weekly. So the same math, which comes out to paying $1448.98 total. Then minus my tax liability of $1506 and then I’d owe the government $57. Which is okay by me.
However paying income taxes is not a law. Do a search on Google Video for “income tax” and watch dozens of videos from many different people who agree that federal income tax is a fraud. When the IRS is asked to show the law, they can’t do it.
SECRETS TO LIVING AN INCOME TAX FREE LIFE!
http://video.google.com/videoplay?docid=-5009035314360427692&q=taxes
That is a very informative video.
I hope this information motivates you to take action and stop being manipulated by the Federal Government.
February 6th, 2007 at 9:13 pm
I’ve adjusted my withholding so that I’m getting a $340 Federal refund this year.
Virginia however – is kicking my butt. I owe $600 in state taxes. I’ll be upping my withholding another $50 this year.
For those who have the “discipline” problem, I opened a high interest savings account outside my normal bank. If you lower your withholding, have that money direct deposited into the second account. It’s there when / if you need it, but it’s out of sight while you’re doing normal banking and brokerage.
February 6th, 2007 at 10:08 pm
Last year using an online calculator provided by HR’s payroll outsourcer, I adjusted my allowances. I just finished doing my taxes and ended up owing $50. I realize now that what the calculator doesn’t take into account is whether or not you itemize deductions, dependent child care, 401K contributions, mortgage interest, charitable contributions, etc. So when using a caluclator to determine how many allowances you should sign up for you need to look at your entire tax picture. I kept the same nubmer of allowances for this year but I will make additional charitable contributions to offset taxes owed.
February 7th, 2007 at 12:50 pm
This, of course, is easier said than done unless your income never changes (would I were so lucky!) and if you never get any bonuses. AND if you have a tax schedule and a withholding schedule handy and if you collude with your spouse. There doesn’t seem to be a lot of middle ground, either you end up getting back $2000 in refund or you owe $2000. You also have to take into account credits, personal exemptions, and any changes from one year to another (combat pay, promotions, children entering or leaving the household, day care expenses, the affect of your AGI on your credit eligibility, etc). It’s really quite a hassle.