Lower Your Income Tax Withholding W-4 Form
It’s that time of the year again! About this time, everyone starts thinking “Thanksgiving turkey” but what they should really be thinking is “w-4 form.” Tax season is right around the corner, and if you’re getting a big refund, you’ve done wrong!
Why Getting a Tax Refund isn’t Good
Sure, it feels good, right? The IRS actually owes you money! Not good.
Ideally, at the end of each year you should either owe Uncle Sam a few bucks, or you should be expecting a small refund. If you’re getting too big of a refund, you’re letting the government use your money for one full year for free. You wouldn’t lend to money to your bank for free, why would you let Uncle Sam borrow it for free? (At least you’re not like TIPS investors, who are not only giving Uncle Sam free money, but actually paying him for the privilege. Insanity!)
November is the best time to start thinking about making an adjustment to your W-4 because you know how much you’ve earned and how much has been withheld, plus you’ve got time to get a new W-4 in before the next year.
W-4 Confusion
I understand the confusion that results from tax forms, and the fear most people have of doing anything related to the IRS. With all the laws on the books, and a tax code big enough to fill most hallway closets, there’s good reason to be worried.
But the W-4 is really no big deal, it’s a simple form designed by the IRS that dates back to the height of WWII in 1943. The government, worried about financing the troops, decided the best way to keep the cash flow going would be automatic deductions. Before 1943, everyone just cut a check to the government by April 15.
So how do you know how to adjust your w-4 to minimize the free money you lend to Uncle Sam? Well, without breaking out the tax brackets and doing some IRS algebra, there’s a really simple solution. Was too much withheld this year or last? Then add one or two allowances. Did you have too little withheld? Subtract one or two allowances.
Things to Take into Consideration
If you purchased a home and took part in the $7500 homebuyers tax credit, the tax credit “loan” is paid back over the course of 17 years. In the first 2 years, you pay nothing. For the next 15 years, you pay back $500. So, if you purchased a home a year ago, make note that in another year you’ll need to have an additional $40 (roughly) per month taken out of your paycheck to cover your repayments.
If you received a raise this year, it’d be best to increase your allowances only slightly so as not to have too little withholding.
Oh, and if you really want to make it a science, the IRS has been kind enough to produce a 22 page document on managing your allowances.
The IRS Tax Code is getting more complex every year. There are 20-50% of the people who file their taxes miss tax deductions and/or credits that they really qualify to get. So all those people are paying more taxes than they are required to pay.