Tis the season! It’s now time to see if you overpaid the big and powerful Internal Revenue Service or if you have to cut that dreaded check this year. I will say that Anthony and I do our own taxes, as they aren’t that complicated. We have some investment accounts, but the rest of our tax stuff is pretty normal. I have a few online tax tools and a w4 calc that I use. Taxes generally take about a half hour, and then we file them electronically, and call it a day. I’m feelin for ya if you are the owner of a company or have complicated taxes – it’s a pain in the arse. But what determines if we get a check or have to write one. This can really be a crap shoot and finding the answer really depends on your situation. I am in no way an accountant, but I have learned some things that I think might help you..
- Exemptions – This is the magical number you are claiming on your W4 with your employer. If you claim 0, this means you are claiming no exemptions and will usually end up with a refund at the end of the year. Claiming 0 just means you are withholding the maximum amount to go towards taxes, which in turn gives you a smaller paycheck. Usually claiming 2 or more will result in you breaking even (owing nothing and getting nothing) or having to cut that dreaded check. Make sure you check with an accountant to help you determine the magical number you should be claiming.
- Do you owe a ton come tax time? Make sure you are claiming all the deductions you are entitled to. Your mouth would drop if you really knew all the deductions that are available out there. Anything from sales tax, health insurance premiums, and charitable contributions can all be claimed on your tax return. If you are spending money, just to claim a deduction – I highly recommend you rethink this decision.
- A lot of it is trial and error. Make minor changes with the direction of an accountant or CPA, wait until next year, and see how it affects you. By doing this, you can usually obtain the result you are looking for.
So on to the discussion if you overpaid the IRS (sorry to everyone else who is pulling out their check book). A lot of people have this money spent in their head the minute they file their taxes for last season. They come to depend on it as regular income. Do not do this. This is not guaranteed income and should not be used for budgeting purposes. So what do you do with it?
- If you have lingering debt, I suggest this is your first priority. Pay off those interest bearing balances and wipe the slate clean, if you can. Remember, your credit limit as well as the balance amount is used by credit agencies to determine a portion of your credit score.
- Hello Savings! This is a good time to accomplish the 6 month rule with your emergency savings. 6 months might seem like a lot, and you might say to yourself “There is no way I can build up a 6 month emergency savings, so if I can’t save it all, I’m not going to even attempt it.” A little savings is better than no savings. At least save enough to cover minor emergency setbacks, such as needing a new tire or a new washer and dryer.
- Think about the future. This is a great opportunity for you max out your Roth contributions or to put a little away for retirement. You might not have a lot to invest, but believe me – compound interest will make up for that! If you have young children, take this opportunity and fund a college savings account. Trust me, you will thank me for this when your child calls you to let you know the bill amount for their first semester of college.
You will also need to make the decision if you want to overpay your taxes and have the IRS hold onto it until the end of the year, or if you want to see extra money in your paycheck each pay period. Many people feel differently about this question. Anthony and I like to receive a big refund at the end of the year. This is not due to us expecting or needing the income, but because I know who we are as spenders. If we were to get that extra money back every paycheck, we are more susceptible to spend it. By getting it back as a lump sum at the end of the year, we are more likely to invest it in things that align with our bigger goals. It also gives us the assurance that we will not owe at the end of year. My husband tells me all the time, “Claim whatever you want, just as long as I don’t owe them a penny.” It’s the peace of mind that ultimately pushes us to claim 0 on our W4s. Everyone’s situation is different. Talk to your accountant to determine what is best for you.
Do you claim zero exemptions or are you aiming to break even. Let me know your thoughts below!
Latest posts by kumiko Ehrmantraut (see all)
- May 2019 Budget Monthly Meal Plan - June 12, 2019