Are you feeling the pain from your reduced paycheck as of the beginning of the year?
When the temporary payroll tax deduction ended in December 2012, our social security tax deductions went back up to 6.2% of our gross pay.
It was only 4.2% when the temporary reduction was in effect.
2% more of your pay may not seem like a huge amount. But on a salary of $2,000 per pay period, that’s $40.
If you’re watching your dollars, that could have been payment on a credit card account, or the cost of milk for a month.
It’s just one more reason you may find that you run out of money before you run out of month.
If you’re like many Americans, however, who have too much income tax withheld from their pay, you can bump your take-home pay back up to the amount you were getting last year, without creating much risk of owing a tax bill next April.
The case for getting paid now
It’s your money, and you should get it now – not next year. The average American taxpayer gets a refund of approximately $3,000 per year. That’s $250 per month. That’s a lot of gas and lunch money, or better yet, cash to pay down credit card debt.
It’s your money, and you should get it now – not next year. (tweet this)
In fact, if you are carrying credit card debt at 18%, letting the government hold your money and pay you no interest at all, while you pay interest to the credit card company, is costing you money.
Another reason you shouldn’t use overwithholding as a savings plan is that if you need the money for an emergency, you won’t be able to get to it.
What if overwithholding is the only way I can save money?
If it seems like the only way you can save money is to not see it in the first place, you’re onto something.
However, you can find better ways to automatically put money into savings than to have Uncle Sam hold it for you.
For example, you can increase the amount you have withheld for your employer’s retirement plan. Doing so may reduce your tax bill, too.
Another option is to have an amount automatically transferred from your checking account to your savings account every month, preferably right after you get paid.
You’ll get the same effect, but your money is under your control and earning interest for you.
How to adjust your Form W-4
TaxACT provides a Q&A section to help you determine the best way for you to file a Form W-4.
Click the Next Year main tab and go through the Form W-4 section. Enter this year’s numbers to the best of your knowledge.
If you’ve completed last year’s return, TaxACT displays the comparison numbers to make it easier.
After you go through the Form W-4 section, print the form and take it to your employer’s payroll department. You don’t need to send it to the IRS.
That’s all there is to it!
When you get your next paycheck, take note of how your tax withholding has changed.
You should go through the Form W-4 section anytime your situation changes; for example, if your spouse starts or stops working or you get a raise. You should also look at it again at the beginning of every year, or when you do your tax return and want to fine-tune the amount you have withheld again.
When was the last time you reevaluated your income tax withholding?