Want a raise? Don't we all?
If you received a $500 tax refund (or more), adjusting your federal tax withholdings could boost your take home pay by at least $40 a month.
For most of us, the only time we adjust our federal and state tax withholdings is when we start a new job. Last year 83 million taxpayers received refunds (nearly three out of four returns). Most of us look forward to receiving that annual refund check, but ironically, Uncle Sam likes tax refunds as well - refunds mean interest for the government. By conservative estimates the interest on the $163 billion the IRA refunded last year was over a billion dollars - money that could have been earning interest in taxpayers' accounts.
Your goal should be to receive or owe as little as possible when you file your return (i.e. you have withheld enough to cover your tax liability through your paycheck withholding or estimated self-employed tax payments). The IRS' minimum requirement is: withholding or estimated tax payments equal either 100% (110% if your AGI is over $150,000) of your liability from the previous year or 90% of your liability for the current year.
Five Steps to adjusting tax withholding:
1. Estimate your current year Federal tax liability (this can be done with Quicken, MS Money or with the IRS' online withholding calculator).
2. Take your projected liability and subtract the amount that you have withheld year to date, then divide that amount by the number of paychecks you have remaining. This figure is the amount you will want to have withheld from each paycheck.
3. Next, ask your HR department how many exemptions correspond to your "per-check" dollar amount. (They should have an up-to-date table for the 2005 tax year. If they do not, they can consult IRS publication 15, The Employer's Tax Guide.)
4. If your projected income for the year varies up or down, you will need to readjust your withholding.
5. Repeat the process for your state taxes if applicable
After you make the changes you may be surprised with the increase in your take-home pay and you may be tempted to spend it all. Don't! Now that you no longer "bank" with the IRS, open an account - savings, money market, or CD -- and begin saving. Start saving today!
For more from the IRS check out the following:
IRS Publication 919, How Do I Adjust My Tax Withholding?
Download a new W-4 Form
The National Planning Group of Ronald Blue & Co. is a unique division within RB&Co. that serves the everyday steward - For more information you can visit their website: www.everydaysteward.com.