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Do you like lending money to the IRS? The answer is yes for
three-quarters of taxpayers.
Every year, about 75% of us overpay our taxes. By quite a lot. In
fact, the average tax refund last year was around
$2,400, which amounts to $200 a month lining Uncle
Sam's pockets until he pays it back to you ... without
interest.
If you hit the refund jackpot last April (or already know that
you're getting a refund this year), then it's time to give
yourself a raise, starting with your next
paycheck.
What's wrong with getting a refund?
I know it's hard to beat the thrill of a
windfall, but consider what you're passing up by giving Uncle
Sam an interest-free loan for roughly six months (on average). If
the IRS were paying out measly checking-account rates of around
0.5%, you'd be able to pick up the tab for a few espressos --
or $6. Even if you could earn 2% from a high-yield savings account , it'd amount to
just $24.
Nonplussed? I hear ya. For those who are tempted to skip this step
and instead rely on over-withholding as an enforced savings plan,
allow me to convince you otherwise.
Think about where else you could get a better return than 0%.
Perhaps you have outstanding credit card debt? Or maybe you have $0
in your emergency savings account.
The point is, you could have $200 extra each month to pay off your
debt (use our "
Get Out of Debt " guide to wipe it out) or pad your
emergency savings (
more on that here ).
Pad your paycheck with an extra $200 a
month
Let's get to the
details so you can start seeing the fruits of today's Fiscal
Fitness tip ASAP.
To complete this task, you'll
need:
- Your most recent pay stub
- Last year's income tax return
- A fresh Form W-4 from your employer, or download one from the IRS website
The idea here is to increase the number of
exemptions you take while avoiding underpaying. To nail the number,
use the IRS'
withholding calculator . The Form W-4
Assistant calculator at PaycheckCity can also help
you.
How much is each exemption worth? Well, generalizations and taxes
are a potentially lethal cocktail, but if you thrive on
rules-of-thumb, figure that each exemption equals about $850 in
tax.
Avoid Uncle Sam's ire
To
avoid underpayment penalties, shoot for the number of allowances
that satisfies 100% to 110% of the prior year's tax payment
(not counting your refund). Don't worry about nailing your
withholding perfectly. Put a reminder in your date book in June,
when you'll have a better handle on how your annual wages and
withholdings will shake out. (Here's more on
how the IRS handles underpayments .)
One more note before you fill out a fresh W-4: This exercise is
best for those who do not anticipate any major life/tax changes
(e.g., marriage, birth, Lotto payout) and have a predictably
consistent income. So if this year looks like it'll be
a pretty close repeat of last year, go snag that $200 monthly raise
right now.
More ways to save ...
Don't fritter away the extra
money: Just because your paycheck is a bit fatter
doesn't mean you have extra money to spend. Nope -- this tip is
all about putting the money you earned to
better use. So if you're going to be tempted to blow the dough,
have it diverted automatically to a separate savings or investment
account. Out of sight, out of mind, and off to better
use!
Get organized and snag all those deductions/credits you
deserve: Everyone gets a standard
deduction, but that doesn't mean you should take it. Millions
of people give up potential tax savings simply because they
don't
keep records or take the time to itemize their deductions.
Especially for homeowners and those with high medical bills,
missing out on itemized deductions is hazardous for your financial
health. And if you do go with the standard deduction, don't
just assume that you should take it on both your state and federal
returns, or you could be leaving money on the table. Try this
simple three-folder tax record-keeping system . What better
time to put it in place than now, at the beginning of the
year?
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Fiscal Fitness Boot Camp instructor
Dayana Yochim has nothing against the IRS. She
just doesn't want want to over-pay her fair
share.
