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In These Tough Times, Don't Let Uncle Sam Hold Your Money!Jan 16 '10 Write an essay on this topic.The Bottom Line With the new year just beginning it's a great time to review your withholding allowances to see if they are in line with your overall tax situation at filing time. The concept of withholding allowances and how they effect your check is a topic that really hits a sore spot with me because of numerous arguments I have had with my friends over the years regarding this, quite frankly, rather straight forward and elementary subject. I can not even begin to tell you how many times I have heard the following from friends " but I like getting a big refund from the IRS ". This is one of the biggest misconceptions in the history of mankind! You are not getting a refund, rather you are getting your own money back from the federal, state, city and/or county government that you had paid in via payroll withholding tax deductions from your paycheck. Basically think about this; if you are over withholding you are giving the government an interest free loan of your own money. Just ponder that for a second and realize just how stupid that is in this time of the national media's criticism of the federal TARP program and the such. By waiting for a huge refund at tax filing time, you are reverse "TARP'ing" the government. Not smart in my epinion. Here is a good rule of thumb to keep in mind - if your year end federal tax refund is in excess of 1% of your federal gross adjusted income, then you are over withholding. Another good benchmark, if your federal refund exceeds $500, then you are over withholding. ( why do I feel like comedian Jeff Foxworthy at this point in my epinion when he's doing his "....then you must be a redneck" routine ). One thing to keep in mind, however, is that you do not want to under withhold as this leaves one susceptible to possible tax penalties. This would result if you end up paying too much back to the government when you file your tax return, either too high a percentage of your total tax liability or over a certain dollar amount. Of course, there is no straight forward rule for how many tax withholding allowances one should claim. For federal tax purposes, there is an associated worksheet on the IRS tax form W-4 which guides you on to how many to claim. Each withholding allowance you claim will lower the amount of federal tax withheld from your paycheck. The IRS withholding tables calculate the tax your employer must withhold based on this in addition to the marital status that you are claiming, plus the level of income on that particular check. Each check that you receive is individually prorated over the entire year so the more that you earn on a particular check in comparison to other checks you get during the year will have a higher percentage of taxes withheld. That's why whenever you work those hours of overtime, you always will see not only a higher amount of federal taxes but in fact a higher percentage of federal taxes as well. With the new year just beginning, now is a great time to review your tax withholding allowances to see if they are in line with your overall tax situation at filing time. If they are not adjust accordingly in order to be financially prudent.  |
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