Tax time is nearing its end and of course many Americans will get a refund, but some will not. But is that what you should do? This year, taxpayers have until April 17th to file their 2017 taxes.
Starting a new job is a really exciting time! The joy of getting an income coupled with creating opportunities to make decisions that will ultimately have an effect on you at tax time the following year. One of those decisions are the allowances that you select on your W4. This decision determines how much of your hard-earned money will be used to pay your taxes. In my culture, whether you are married with three kids or single, the unspoken allowance truth is to withhold the least on your W4, collect a refund when you file, go on a shopping spree with money. And I personally did this when I first started working at McDonald’s as a teenager up until young adulthood.
So What is Really Going On?
The rule of thumb for allowances is the lower the allowance, more is set aside and the higher the allowance, less is set aside. Technically, a refund is an overpayment of taxes from the federal or state revenue services. Whenever allowances are set on W4s an amount is deposited and held in an “IRS account” without giving any interest for holding it. Is that a good way to let your money work for you? If you are not disciplined, the refund option may be the best option for you. The key to dealing with the discipline aspect is to automate your plan. But hear me out…
If you are wondering how much you should withhold, the IRS provides calculators for you to estimate your 2018 taxes and based on your 2017 tax liability along with some other key information will give you an estimate of how much you should set aside for taxes and what allowances to select to get more of your money throughout the year. Paycheck checkups can be done frequently throughout the year to account for any changes that may occur throughout the year such as job changes, additional income that you had not accounted for previously.
What To Do?
The extra income from the refund or the “monthly refund” can be used to:
1. Pay down debt
2. Save extra for retirement
3. Add to your emergency fund
4. Renovate a space in your home
Resist the urge to use all of your refund toward vacations or other stuff that will be of no value once they are used. The key is to start small, any amount helps to ultimately get you to your goals.
The Balance gives a full article about reducing your tax bill, here is my summary:
1. Income Reduction through pre-tax savings such as retirement plan contributions through work or traditional IRAs, health spending accounts, and health savings accounts
2. Tax Deduction Increases through mortgage interest, charitable giving, and car registration fees
3. Tax Credits through college expenses, adopting children, and saving for retirement.
Please keep in mind that this information is for educational purposes only. For questions specific to your situation, please contact your tax advisor or me for a referral to a tax advisor.
About the Author: Grenata Vessel
Grenata is the owner of Virtuous Financial Group, LLC, a financial advisory firm, which serves Texas and North Carolina. Website, LinkedIN, Facebook