Monday, February 17, 2014

Keep More Of Your Money

It's tip time!

Being a stay-at-home mom for about 13 years of my adult life, I know how to pinch a penny or two. Meal planning and having a detailed shopping list are important to not have impulse buys when you are at the store.  Living under your means rather than beyond your means is important too.

This time of year though I can't help but think about how many people over the years I have shared this tip with, and it has made a huge difference in their monthly budgeting.  This tip can actually add hundreds of dollars to their take home pay every month.

The tip is as easy as your W4 form. This is the form you fill out that lets your employer know how many allowances you are going to take so they know how much money to take out of your paycheck to pay for taxes.


Many people think, erroneously, that they can only take as many allowances on their W4 as they have dependents or how many people they have in their family.  So, for example, they think they can only claim as high as a four on the W4 form if they have four people in their family.  This is false.

The reason I think this form is so important is this.  It determines how much money you are going to allow your employer to pay the IRS every paycheck.  If you get the numbers wrong, you could end up owing the IRS a lot of money at the end of the year, or you will pay the IRS too much money which will give you a refund at the end of the year.  Your goal, in my opinion, is to get this number so close that you will neither pay too much or get refunded too much.  You want to try to break even.

I have had many friends over the years who have come to me and been really struggling financially with making ends meet month to month.  One of my questions to them will inevitably be if they get a refund back every year when they file their taxes.  Every time the answer has been yes.  I then recommend they adjust their W4.

Let's use this as an example:
Sara files her taxes every year.  She is married, and she and her husband have lived in the same house for years.  They have two children.  Her tax liability remains fairly constant from year to year in reference to her dependents, mortgage deductions, charitable contributions, etc.  If Sara has gotten $5,000 back as a refund every year consistently for the last few years, what does that mean?  It means that Sara has given the IRS an interest free loan out of her paycheck of $416.67 per month ($5,000/12 months=$416.67 per month).  Why are we as Americans doing that?


This is like us going over to our neighbor's house and saying, "Hey, here is a $400 check.  Deposit it in your account and earn interest on it.  I will bring you a $400 check every month for the next year.  Next year, around this same time, I will come and pick up all of my money.  You can keep the interest."  Please tell me you would not do that, right?

With a country that is deep in credit card debt or families that are living paycheck to paycheck or have nothing set aside for their inevitable emergencies, what would $400 a month more income mean to you?

Here is how you do it.  Find out what you are claiming now for allowances on your W4.  The HR department with your employer should be able to tell you if you don't know.  Most paychecks will show how many allowances you are taking.  How much of a refund did you get back this year?  Be careful here!  If you had special circumstances this year which were not usual in other years or you are expecting special circumstances in the coming year, you might not want to adjust your W4 now.  However, if you consistently get back a similar amount for a refund and your tax situation seems to stay pretty constant, you are probably safe to change your allowances.  If you are claiming 5 for example on your W4 and you are getting a refund of $5,000 consistently, check with your employer to see where claiming 10 could put you.  Remember, with a $5,000 over payment, you would want the tax that your employer is taking out to be reduced by about $400 per month or even less if you want to be extra cautious.  The W4 form itself helps you to calculate what your allowances should be.  Fill out the form and see what it says.

Again, be careful!  Carl and I have always tried to err on the side of being too cautious when raising our allowances.  We would rather get a small refund than paying in.  We discuss our W4 after we do our taxes EVERY year.  Most years we only change our allowances by one or two to be conservative.  Some years we make no changes at all.

I am not a tax professional.  I am just a mom.  Every tax situation is different, and I caution you to not make any changes to your taxes that you don't understand.  Seek out a tax professional, an attorney, or your employer with any questions and for guidance about how you should properly use your W4 form.  I'm just trying to give you some ideas how you can get more money in your pocket so you can use your money how you see fit rather than how the government sees fit.

"Dishonest money dwindles away, but he who gathers money little by little makes it grow." Proverbs 13:11, NIV

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