Picture this: It’s April 15th, you’ve been planning a trip to the Caribbean for a year. All inclusive, on the beach, finally you get to relax. Your tax return is coming and is going to be the final payment to get you there. But then, BOOM — you aren’t getting a return this year,— you actually OWE.
If this scenario is hitting home, you aren’t alone. Getting the most out of your paycheck while minimizing problems when you file your federal income tax return is a little like a challenging game of chess. If you know the right moves and adjustments, you can make your money work for you. Unfortunately, one wrong move — and it’s checkmate.
The good news is that you CAN calibrate how much is withheld from your paycheck with a W-4 form. It’s a form everyone fills out when starting a new job. The problem is that many folks fail to review their W-4 choices when life circumstances — a marriage, a new baby or a divorce, for example — change.
Here are some simple ways to optimize your W-4:
1. Get Support: Don’t know where to start? You aren’t alone. Luckily The W-4 form comes with a worksheet that can help you decide how many deductions should be applied to your withholding, and you can even ask that a specific additional amount be withheld. You can also use the Internal Revenue Service withholding calculator to help you decide your withholding amount.
2. Adjust your Withholdings: You may need to adjust your withholdings if you’ve gotten a raise, started a second job or have another source of income. If you previously claimed your children as dependents and they are now on their own. If you’ve been unemployed for part of the year, if you’ve gotten married and your spouse doesn’t work or earns much less than you, or if you’re paying more for mortgage interest or charitable donations. There are many reasons to adjust your withholdings — ask your HR Director, tax preparer, or the person who handles your paychecks for help.
3. Know The Rules: If you are self-employed, you need to follow different rules and make estimated payments. More on those rules are in IRS Publication 505.
4. Invest in your Future: Investing in your future is beneficial to the present too. If your employer offers a 401(k) or similar retirement plan, have regular contributions deducted from your check. Income tax on that money is deferred until you withdraw it and will reduce the amount of tax withheld from your check. For example, if your paycheck is normally $1,000 and you contribute $100 of that to your retirement account, your employer will withhold federal tax on just $900 instead of the full $1,000. You’ll eventually pay income tax on your retirement savings, but retirees often have smaller incomes and pay taxes at lower rates. You can also take that retirement contribution into account when you revise your W-4.
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Writing a check to the IRS in the spring is never fun, especially when it gets in the way of life. If you’re writing those checks, you need to revise your W-4 so that more money is withheld. Take the time to review your W-4 at least once a year. You should aim to use your money yourself and keep the “amount owed” on your federal income tax form as close to $0 as possible.
For more tips and tricks to optimize your money, visit moneymentor.bangor.com