Do you know why stories of people with $.32 refund checks are in the news?
Because they are so rare!
Most people want to get a big tax refund.
Big tax refunds aren’t always a good idea
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Getting a huge refund is an extremely inefficient use of money – both for you and for the government.
I recommend adjusting your withholding so you can bring more money home and put it towards your goals:
- Pay off high-interest rate debt
- Building up reserves
- Saving or investing
How? By adjusting your tax withholding.
Did you know you could change withholding mid-year? All you need is to complete Federal Form W-4 and submit it to your employer (Benefits department or HR manager, etc).
What do I change it to?
To find the answer you need to run a mid-year income tax assessment.
Run a mid-year income tax assessment
Making course corrections in August helps steer your tax withholdings closer to the target – which is to owe nothing or get a small refund.
It’s almost impossible to be exact, there are too many moving parts, but you can bring your tax-boat closer to the dock in the last few months of the year.
Gather together the following items:
- Last year’s tax return
- Last year’s Schedule A (if you itemized deductions)
- Your last two pay stubs (include your spouse’s as well)
Note: If you have a small business or are an entrepreneur then you will need to run a Schedule-C calculation to estimate self-employment income. You may also want to see a tax professional.
Also, you will want to estimate any:
- Child/Dependent Care expenses
- Expected bonuses
- Expected interest, dividends, etc
I use tax preparation software to run my calculation but you could follow the prompts at the IRS website to complete a mid-year tax assessment:
If you anticipate a huge refund
You could choose to do nothing and continue giving the government more of your money, interest free, and get a huge refund April 15th.
However, I recommend you increase the number of allowances on your W-4 and give it to your benefits department or HR person. They will adjust your withholding to get you closer to zero.
If you would like help running this calculation then contact me and we will run through it together.
Federal forms and resources mentioned in this episode:
Federal tax withholding calculator: http://apps.irs.gov/app/withholdingcalculator
Federal form W-4 (change withholding): http://www.irs.gov/pub/irs-pdf/fw4.pdf
Federal form Schedule-A (Itemized Deductions) http://www.irs.gov/pub/irs-pdf/f1040sa.pdf
Federal form Schedule- C (Profit and Loss from Business) http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
*Disclaimer: I am not a tax preparer or tax advisor. This is a service I normally provide my U.S. clients as part of their coaching process. It is intended to provide valuable information only that you can use to improve your financial situation.
What type of budget do you use?
We use YNAB (You Need A Budget) in the Stewart household.
Try YNAB (You Need A Budget) for 34 days and receive 10% off if you keep it http://SteveStewart.me/YNAB
Ponda from the Honda
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Only 5 1/2 more house payments to go!
How $5 a week turns into $228,000
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$5 a week for 45 years at 10% growth is $228,000.
Easily open an IRA account or education fund for your kids with Betterment*
Below is a screenshot of my “$100 a month” experiment. I started the account in 2013 and it’s not doing too bad.
* Note: Your results will vary. Past results are not indicative of future returns