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Don't give Uncle Sam an interest-free loan

You've been working for a month now. You've gotten a paycheck or two (or more). Now it's time to evaluate how much of your money is going to the IRS each payday.

If you are an employee, most of your tax payments are made throughout the year via payroll withholding. A lot of people overpay, which means they get a big refund when they file their tax returns.

While it might be nice to get a big check from the IRS every spring, your goal should be to pay Uncle Sam as close to your actual final tax bill as possible. If you overpay the federal government, that means you're giving the U.S. Treasury free use of your money. Wouldn't you really rather be in control of as many of your dollars as possible?

To ensure that happens, you should reassess your withholding amount at least once a year. The earlier in a year that you do so, the more of your money you'll get during the remaining months.

You can do so by running your pay numbers through the IRS' online withholding calculator.

It's not perfect. You're essentially making a guess as to what you're taxable life will be the rest of the year. But it should get you closer to handing over each payday only what you will owe Uncle Sam at the end of the year.

Daily tax tips: Adjusting your withholding is the subject of today's Daily Tax Tip. It's #20 on this year's list of tax tidbits I'm again writing for Bankrate.com's annual tax guide.

Pointing-finger-right-332px Every weekday through the April 15 filing deadline you'll find a new tip atop the righthand column of the ol' blog.

Yep, over there. Now go all the way to the top. You got it.

If you missed any of the previous 19 tax tips, you'll find them (and future ones, too) in this comprehensive list.

I've also covered the important withholding adjustment topic in Give yourself an end-of-year pay raise.

Making Work Pay considerations: Finally, remember that this year the Making Work Pay credit also affects your withholding.

This tax break, which is $400 per working person, took effect last April. For 2010, it's been in effect since the beginning of the year. Yes, that's why your first paycheck this year was a little smaller than your last one of 2009; the credit is now spread over 12 months instead of just nine.

But the basic premise of the credit is the same. Your withholding is slightly less so you have a few more dollars to spend each payday.

In in some cases, though, the changes built into the new Making Work Pay withholding tables don't quite work. That could be the case if you have two jobs or you and your loving other half both have jobs or you're the dependent of another taxpayer.

If one of those describes your situation, you could end up having to give some of the credit back when you file Schedule M (bummer!).

To avoid that, account for your personal Making Pay Work situation by tweaking your  withholding now. Again, the withholding calculator should help here.

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Comments

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Paula

I agree on that theory hopefully be saved or used to reduce their debts.

Paula
info@loansquickly.co.uk
http://www.loansquickly.co.uk

Tom Scanlon, CPA, CFP®

Kay,

Good post. I agree with the theory. The reality however can be somewhat trickier. With interest rates near zero, the interest free portion almost doesn’t matter.

Many people seem to have been ‘trained’ to have enough withholding to get a decent refund every spring. They look forward to spending this on, well, you name it. Going on vacation, having a down payment for a car or just some home improvements are frequently mentioned to me. For many people, they really look forward to this refund.

I totally agree people should adjust their withholding to breakeven when filing your return. With that said, people need to be cautious when they adjust their withholding and have less tax taken out. This “raise” they are getting should hopefully be saved or used to reduce their debts.

Regards,

Tom Scanlon, CPA, CFP®

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