A friend of mine is the comptroller of a small corporation. As such, she is required to handle all aspects of that company’s finances including payroll. She takes the opportunity to figure and tweak the withholding from her own paycheck to reach her goal of neither owing taxes nor being due a refund on April 15.
She’s really smart and fortunate to be able to track this so closely. Her goal is to always come within $100 of her total tax liability after itemizing her tax return. And she does.
I always wince with pain when a person tells me he or she is getting thousands of dollars in a tax refund. And it’s even worse when they do so with such gusto and pride — like it’s some kind of savings account. A righteous accomplishment. And invariably these are people who carry credit-card debt, convinced that they need it “just in case of emergencies,” followed by, “Hey, emergencies happen!”
It makes no sense for you to willingly over pay your taxes every payday, and then depend on credit cards to make up the shortfall when something unexpected happens. Paying double-digit interest on a revolving credit-card balance just adds insult to the financial injury.
Another friend, a single mother, just recently got $4,500 in the mail as a federal tax refund. She’s one who struggles, depending heavily on her credit cards to make it through the month. Imagine if she would wise up and adjust her withholding so that the nearly $400 monthly overage stayed in her paycheck. And imagine further that she put that $400 into a special safe place just for emergencies. She would have the $4,500 available to stay out of debt. That just may be the money she needs to live financially responsibly.
Instead, she finds herself deeper in debt than she was a year ago and sees her tax refund as some kind of a windfall — found money, a gift from the government.
I just don’t get why people are so content to over pay their taxes and then receive not even a nickel in interest for having lent it to the government all year long. I hope you just don’t get it either.
If you have already or plan to receive a big refund in the future, do this: Divide the amount of your refund by the number of pay periods you have each year. Or if you are self-employed, divide by four. This is a rough estimate of the amount you are over paying each pay period, or quarterly if you pay estimated withholding.
Make an appointment with the department or person who handles payroll and request to fill out a new W-4 form. Ask this person to assist you in determining how many dependents to claim to make the proper adjustment. Or go to IRS.gov and use the withholding calculator. If you are self-employed have your accountant make the adjustment to your quarterly estimated forms.
One last thing. Before you see a dime of this adjustment in your next paycheck, take the steps necessary to make sure the overage does not evaporate or become absorbed in your daily spending. Have that amount automatically deposited into a savings account so you can keep you eye on it and so it will be there when you need it.
Mary Hunt is founder of www.DebtProofLiving.com and author of 24 books, including her 2013 release, “The Smart Woman’s Guide to Planning for Retirement.” You can email her at mary@everyday
cheapskate.com, or write to Everyday Cheapskate, P.O. Box 2099, Cypress, CA 90630.