Whew, can you believe the big T-Day was a month ago yesterday? I know you’re probably ready to forget about Uncle Sam for a while now that all the form gathering and check cashing (or writing!) is behind you, but I’ve got one more thing for you to cross off your list.
Bummed that you owed this year? Thrilled you got a big refund? I’d prefer you land right in the middle. You’ve probably heard that getting a refund is like giving the government an interest-free loan and I have to agree despite the fact that interest rates are practically zilch these days. Another reason I actually don’t want you to get a refund? I’d rather have you take a little more home each paycheck so you can incorporate the funds into your budget as opposed to getting a big check that is tempting to spend. Seventy percent of Americans received a refund last year (for their 2015 returns) and the average amount was almost $3,000. That’s another $250 per month you could use to pay down student debt, contribute to retirement, or save for an awesome vacation!
I know we’d both prefer that you didn’t have to write a big check either. If you underpay by too much you’ll not only have to cough up the taxes you owe but potential penalties in addition. It can throw your budget out of whack and I’d hate to see you dip into your savings for an expense you can plan for throughout the year.
I mentioned in my post on merging finances that I used to have this crazy master spreadsheet I used to track my finances. It’s practically office lore since it has been passed around between my coworkers over the years. I had set up the formulas so you could enter the number of hours worked and it would calculate regular and overtime pay. Once it had a pre-tax amount for each paycheck it would calculate deductions being taken out for your 401(k), healthcare, bus pass, federal taxes, state taxes, etc. so I could see the amount I would actually receive in my bank account after the deductions. One of the things you could do was change the number of withholding to see how it would affect the amount of taxes that were going to be taken out. From there I could compare my estimated withholding for the year vs. what I thought I’d owe. After playing around with the numbers I’d update my paperwork with payroll to ensure I’d be as close as possible come April. Sadly I stopped maintaining the spreadsheet when Roberto and I combined finances and our situation got a little more complicated.
Lucky for you, you do not need to be a spreadsheet freak to get your allowances straightened out. If you’re like me, your W-4 was one of many administrative forms you filled out on your first day and you may not have given it another thought since. This important piece of paper tells your employer how much to deduct for taxes from each paycheck, and if you find yourself getting or owing money it’s probably because this paperwork is out of date. You can follow the instructions in the W-4 to make your updates, but I prefer either the IRS Withholding Calculator or Turbo Tax’s more intuitive option to guide you along. You definitely do not need to do this multiple times a year like I used to do either. If you have a regular recurring paycheck I’d recommend checking your withholdings once a year as tax rates change. If you receive annual or quarterly compensation in the form of bonuses or commissions I’d suggest checking your numbers with each one of those payments since employers withhold taxes from bonuses differently than they do for regular compensation and that can often result in underpayment. If you have a more complicated situation such a stock options you’ll likely need to work with a CPA to come up with quarterly estimates. Of course, any major life changes such as a new job, getting married or having a baby always warrants a tax check-up as well.
Hope that helps you get your taxes in line for 2017… happy number crunching!