What if I asked you to send me $250 a month for the next 12 months so that I could invest it and earn interest for myself. At the end of the year, I will have $3,000 of your money. At that time I will go ahead and give you your $3,000 back but without interest. Would you do it?
As crazy as that sounds, that is what a large percentage of US citizens are doing when they get a yearly tax refund.
They pay more taxes than they need to all throughout the year and then ask for their money back at the beginning of the next year.
Of course, the reason most people do this is so they won’t end up having to pay any taxes at the end of the year. However, giving money interest-free for a year is not great money management. Further, letting the government hold money interest-free while simultaneously paying interest on other debts is not wise.
There is a way to figure out how many allowances you should be claiming on your W4 form so that you will come out even at the end of the year. The IRS actually has a calculator on their website for that very purpose.
Anita writes, “When I found out about this, a year ago, I thought that claiming more allowances was illegal or against the IRS rules. But after visiting the IRS’ site I found that it is actually encouraged to figure out how many allowances you can claim to prevent overpaying.
After filling out the calculator, I asked my employer how I should change my W4. He had me call PayChex (the company that processed payroll for him) and I simply confirmed my ID and had them increase the allowances.
The next paychecks we received resulted in an additional $237.00 of cash flow. Thus, we were able to pay off our vehicle much earlier and save money on interest.
When we did taxes the next year, we actually got a very small return back. I was elated that the calculations were correct, that we had paid off our car, and that we had saved on interest.”
So Challenge #29 is to go to this link and figure out how many allowances you should be claiming so that you will not be paying more taxes throughout the year than you need to. Then fill out a new W4 (found here) and give it to your employer, or ask your employer how you can change the allowances on your W4.
Tips to make this easier:
- Have your most recent pay stubs handy.
- Have your most recent income tax return handy.
- Estimate values if necessary, remembering that the results can only be as accurate as of the input you provide.
Filling out the calculator will result (for most) in extra money. You can use it to pay down your own debts and save on interest or invest it and earn a little interest for yourself!
Need ideas on investing? Check out Anita’s blog post on poor, good, and great ways to invest here.