Making Tax Adjustments

by Kevin on February 25, 2008

Well I just finished up our taxes on Saturday afternoon. The damage isn’t too bad as far we are concerned. We owe the federal government just over $500, and Alabama owes us about $375. Don’t ask me how it got that way, but that’s what TaxAct came to. Net result: we owe $125. Thankfully, we had socked away $1,500 “just in case” for taxes.

We had several life changes in 2007 that affected our taxes considerably:

  • We got married in January.
  • We bought our first house in September.
  • My wife graduated in May and started her teaching job in August.

I told my wife to work her W-4 so as little tax as possible was withheld, within reason. I would rather owe $100 than get $1,000 back. She told the HR department this and they said they would take care of it. Result? We don’t know what exemptions they put down and she is being under withheld greatly. A simple mistake that can cost you big at tax time. Thankfully, it is a simple fix. We will make an adjustment to that this coming week so we don’t owe more next year. Owing too much can result in penalties and nobody wants that!

Are you ending up with a massive refund this year? The same in years past? Stop loaning the government money interest free. You can make withholding adjustments at any time during the year. Plus it increases your take home pay! As long as your diligent with the money, you end up better off. Granted, some folks know themselves well and decide not to do this. They fear they will blow the extra money. That’s understandable. However, here is what I would do if I got a huge refund two years in a row.

  1. Print off a new W-4 form (PDF) and make adjustments to my withholdings so more tax is taken out each week.
  2. Take my large refund amount and divide it by 52 weeks. This tells me how much money I should save each month to get the same result. Example: A $1,000 refund would be $19.23 per week.
  3. Open up an ING Direct savings account and set up automatic weekly withdrawals of $19.23.
  4. End up with $1,000 plus all of the interest earned over the year (of course, minus income taxes on that interest as well).

Alternatively, you could look at your next paycheck and see what the difference in take home pay before and after comes out to. Take that difference and save it.

Especially if you are in debt, increasing your take home pay can be huge. Sure you can apply your refund to the debt, but the entire last year you would be paying interest on the debt while also giving out money for free to the government. That is some seriously bad math. An increase of take home pay of just $12.50 per week would be a plus — that’s another $50 towards debt. You could save a ton of money in interest.

I would also monitor my withholding with the IRS’ Withholding Calculator. I was impressed with this tool from the government. You input data from your pay stubs, the previous year’s tax return, etc. and it tells you if your current withholdings on your paycheck are on track. If they are seriously out of alignment, positive or negative, you get a heads up that something needs to change. Notice a problem in March and you’ve got a lot of time to make changes. Notice it when you are doing your taxes next year and you are out of luck.

In short, taxes are part of life. Refunds don’t have to be.

{ 1 comment }

Fiscal Musings March 5, 2008 at 8:58 pm

Far too few people actually take the time to plan out their tax burden.

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