Rethink That Withholding Thing
by Bob Williams
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Oh, we know it’s always nice to get that big income tax refund check from the IRS. Party time, right? But what if we told you that you were missing out on even more money – simply by getting that big refund year after year? Sound confusing? It’s not, really.
It boils down to this: The IRS gets to use your money for most of the year. Wouldn’t you like to have it all year, rather than waiting for a tax-time check?
If you're employed and get a sizeable refund just about every income tax season, there’s a good chance you don’t have your withholding structured correctly. You might have too much held out for federal taxes – and that generates the big refund check every year. True, it’s sort of like a mandatory savings account that pays off once a year. But you’re still losing money on the deal.
That over-withheld income doesn’t carry an interest rate. It’s pulled from your paycheck and it just sits there in an IRS account. And you get some of it back according to the results on your tax return. It’s a dollar-for-dollar proposition. You don’t lose that money – but you don’t gain any, either.
You can change that.
Make the System Work
Give this a try to see what you have to gain. Add this year’s tax refund amount and the refund you got last year. Divide by two to get the average refund amount. Then, divide that average by 12. That’s a ballpark figure for how much you set aside every month for taxes that could be in your pocket. You can even round it down to the tens (30, 40, 50, etc.) if you want to keep back a little extra.
Now, here’s where that “making money” thing comes in. Imagine taking that monthly sum and getting a little bit of interest on it.
If you subscribe to the tax-refund-as-savings-account theory, you might also endorse the idea of hanging on to that cash, and investing it. Invest? In what?
The answer: Just about anything that will make money. At the lower end are savings accounts and Certificates of Deposit. They typically carry lower interest rates, but are great for holding on to principal. Many banks also offer money market accounts now, which could offer better rates than a simple savings account. Check your local banks or credit unions for details.
There’s another advantage to adjusting your withholding to more realistic levels. You’ll have a little more in each and every paycheck. Sort of like getting a raise, isn’t it? And you’ll have access to that cash all year long, not just in April.
We’ve Got Your Back
If taking a second look at your withholding sounds good to you, the first stop you’ll want to make is right here. The IRS has a withholding calculator that can help you decide just how much you need to hold back – and how much should go into your pockets. The IRS has this to say about your withholding choices:
“As always, the IRS urges workers to review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer. For example, individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or large refund at the end of the year may want to consider submitting revised W-4 forms.”
We believe we live the best when we keep what is ours. If you manage your withholding amounts correctly, you can get a little more in your paycheck – and still not pay any extra taxes at the end of the year. And that can make tax time a lot less scary.
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