Keep More of Your Paycheck

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How to get complete your W-4

It is the beginning of April and most people are fretting about filing their taxes and whether they will receive a refund or if they will have to pay Uncle Sam, so this is a great time to encourage people to learn better ways to improve their relationship with money. One of the most overlooked ways to reduce the stress of tax time is to make sure that you are selecting the correct withholding amount from your paycheck. Not only does it change the amount of money that you will receive in your paycheck on payday it will make filing your federal taxes less of a surprise.

If you are like me, and most other people that I have asked this question, many people fill out the W-4 federal withholding form the way that their parents told them to when they started their first job. I know I was so excited to have the chance to make my own money as a teenager that I took all of my forms home from orientation and asked my mother what to put on each form tossing aside the helpful calculators and guides that are always included and took her advice. Her suggestion was to claim 1 exemption which represents myself to get more money in my check now or 0 if I wanted them to take more now and get a refund at tax time. Well who wants to give more money away then necessary? Not me, and so began my love affair with the 1 exemption. As time passed I continued to I follow this rule of thumb through various states of life including marriage, becoming a mother and then divorce. I always ignored that handy withholding calculator and fell back on what I had been told.

About four years ago while talking to some friends about taxes someone mentioned  that most people are giving the government an interest free loan from their payroll by not using the calculator to determine the correct exemption that they should be claiming. Doubtfully, when I when home I looked  up the form and the calculator from the IRS website (https://apps.irs.gov/app/withholdingcalculator/) and filled in the information as it related to my life and found that I was not using the correct exemption. Shocked and convinced that this new number was much too high to be correct I filled the form out three more times and every time it showed that I should have been claiming a much higher exemption. Nervous to break from habit I split the difference and used a higher number then I normally did but less then was recommended by the IRS, fully prepared to owe taxes the next year for underpayment. To my surprise not only did I not owe any taxes I actually received a small refund because I was still overpaying.

The IRS, and many tax professionals, recommend that people review their exemptions annually because the government routinely makes changes to the tax laws and those changes may affect the amount of income tax that you owe or received as a refund. The need for this to become an annual change became apparent to me this year when so many people were lamenting in the news and on social media about how much smaller their federal tax refund was going to be this year due to the changes written into law in 2017 that would be effective for the 2018 tax year. I read many reports of people who made the same amount of money and had the same exemptions yet received half or less than the amount that they received the previous tax year. More people owed when they normally don’t, and they were justifiably upset by this change considering they did not have any significant change in their income from the previous year. Many people count on tax refund checks for debt repayment, vacations, home repairs, catching up on past due bills, savings or to just stay afloat and were now at a loss for what to do.

I am not a tax professional and everybody’s financial situation is unique, so I highly recommend that you consult a licensed tax professional before you rush out and start changing all of your withholdings. Personally, I do not like the idea of overpaying taxes annually with the hope that the government will not make some policy change that will cost me money. I have no problem paying my fair share of taxes however it makes no sense to me to hand the government extra money just to watch them keep it and then ask for more all because I didn’t take five minutes at the beginning of the year to review my exemptions and make any needed adjustments to avoid fees. The reverse of this may also be true. If you find yourself constantly owing taxes annually you should also take a look at your exemptions because you may be underpaying and that can be quite costly as well so talk to a tax professional or read the guidelines that are available to all of us on the IRS website to get a better understanding how to best organize your withholding.

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