Ahhhhh……the end of tax season nears and for the 75% of taxpayers that received a refund, the thought of taxes has most likely come and gone. For the other 25% of us that have waited until the last minute, we have until Tuesday, April 17, 2012 to file and pay our hard earned money to Uncle Sam. While it would be nice to receive a refund, I am not upset that I owe a few hundred dollars because I know that I was able to earn interest on my money instead of letting Uncle Sam earn the interest. Basically, if you received a refund this means you are withholding too much from your paycheck.
When most people fill out their W-4 at the time of hiring they will usually claim allowances of 0 or 1, which will result in the maximum federal income taxes taken from their paycheck. Did you know you can put as many allowances as you want on your W-4 within reason? Here is a calculator from the IRS to help you figure out how many allowances to claim. The calculator will figure out your deductions and tax liability to calculate an allowance that will get you closer to $0 of taxes due and refunded. This means you are receiving the right amount with your paychecks and you are able to earn interest on that money instead of Uncle Sam.
Many people like receiving that big refund check every year, but they don’t realize it’s their money in the first place. Your withholding allowance should be checked every time you have a life changing event such as a marriage, purchase of a home or the birth of a baby. If you haven’t had a life changing event and feel that you want to start receiving your tax refund with your paychecks, you can change your W-4 at any time. Additionally, that extra money each month may make budgeting much easier. Stop allowing Uncle Sam to gain interest off your money.
If you have any questions about W-4s or withholding allowances to you should contact payroll department or a tax professional.
Have you adjusted your withholding allowances? Do you prefer to receive a larger paycheck or a tax refund? Let me know in the comments below.
“The hardest thing in the world to understand is the income tax.”