Stop Loaning The Government Interest Free Money, Fix Your Withholdings

By Nick Bautista

Have you ever wondered why you get that tax refund after filing your taxes? If you do then here are a couple different ways to calculate and adjust your W4 withholding.

First, you must understand why this is happening. Every year if you work and earn a living you will owe taxes, some percentage paid to the government. If you are a W-2 employee you will see the taxes taken out of your paycheck usually under the taxes withheld section under federal income tax.

The amount that is coming out of your paycheck was set up by you. When you were first hired at your job you were required to fill out what is called a W4. The selection you chose on that form set up the amount of withholding you wanted your employee to take out of your paycheck. For example, below is a fake check, but it displays the taxes taken out. (See blue arrow) In this example 10.7% is being withheld from Jane’s paycheck. Whether this is good or bad depends on her specific tax situation.

 

The key is being able to understand then project out what your income will look like for 2014.
There are several ways for determining what to claim on your W4.

On our site we have a calculator called the 1040 Tax Calculator that helps you to see how much you could potentially owe in taxes. In conjunction with this calculator you will be able to see the average tax you potentially could owe. For example if I input $100k for myself and $20k for my spouse in earnings for 2014, we would owe $16k in taxes, while using the standard deduction.

 

As you can see above our average tax rate is 14.05%. This would be the amount I would want to have withheld from my paycheck.

Now if that seems too confusing there are two separate options that might be easier.

The first is a shorthand version. Take a look at your tax return for 2013. Go to page 2 and look at your deductions found on line 40. Take that number and divide by the number personal exemptions you are claiming on the first page under exemptions. Using the same example above I would take 20,000/7,800 = 2.6. This would be the number of exemptions I would claim on my W4. The 7,800 correlates with the number of exemptions I am claiming.

For instance if you’re single divide by the standard exemption which for 2013 is 3,900. If you’re married you would just multiply 3,900×2. If you have kids you just multiply the exemption by 3 or 4 depending on how many.

The second option is to use another calculator found through Turbo Tax:

https://turbotax.intuit.com/tax-tools/calculators/w4/

This calculator will help walk you through a number of steps much like the way I showed you how to project out your 2014 income/taxes. Turbo tax makes it into a simpler more intuitive version for you.

You now have tools to use to stop loaning the government money tax free. If you continue to receive refunds every year you are letting the government make use of your money for almost 12 months. Think about it, every paycheck you give to the government more than you should then they refund it back to you at the end of the year. I hear the excuses of not wanting to owe anything or it’s nice to get money back.

Why wouldn’t you want to use your money now, rather than waiting a year?

Do you like giving your hard earned money to the government to use then give back to you?

What action can you take now to make sure you get the right amount taken out of your paycheck?

All the above are ideas and should be replaced by the advice given to you by your tax professional. Each case is unique and should be treated as such. Commonwealth does not provide legal or tax advice.