Thursday, January 29, 2009
So you are interested in increasing your monthly income in five minutes. According to HR Benefit's Alert's article, "Three ways employees can boost their income," the first one says:
"All they have to do is change their W-4 forms to avoid overwitholding. Federal law allows employees to revise their W-4s any time of the year.
Big tax refunds are badEconomists say most people fill out W-4s too conservatively, and rarely change them after starting a new job. Of course, most people who claim too few W-4 exemptions do get bigger income tax refunds every April. But they’re essentially giving an interest-free loan to Uncle Sam for the majority of the year, and taking the money out of their own pockets."
So if you like giving the government your hard earned money interest-free, feel free to stop reading. This post is not for you. Likewise, if you using the government as your "official savings account to pay for your vacations and home improvements and don't plan to learn how to do it on your own and actually earn interest, then this post is not for you either.
The 2009 W-4 form is located on the IRS website and also your employer will have these same copies. Here is the IRS link for a PDF of the form. The form has a short worksheet to help you correctly identify what your deductions should be.
You can also use the IRS on-line calculator to see if you are currently correct. They say on their website that it is not as accurate as the actual form, I would recommend this as a rough suggestion, but do the form too if you are considering making an adjustment to your W-4.
Often I run into people who feel guilty claiming more deductions on their W-4, they seem to look at me as if it is dishonest. They feel their family of four should only claim 4 deductions. Well, let's look at a part of the form. Answer the questions honestly for your situation and then you will know what you should claim. I have taken this directly from the W-4 form worksheet.
Personal Allowances Worksheet (Keep for your records.)A Enter “1” for yourself if no one else can claim you as a dependent
B Enter “1” if:
You are single and have only one job; or
You are married, have only one job, and your spouse does not work; or
Your wages from a second job or your spouse’s wages (or the total of both) are $1,500 or less.
C Enter “1” for your spouse. But, you may choose to enter “-0-” if you are married and have either a working spouse or more than one job. (Entering “-0-” may help you avoid having too little tax withheld.)
D Enter number of dependents (other than your spouse or yourself) you will claim on your tax return
E Enter “1” if you will file as head of household on your tax return (see conditions under Head of household)
F Enter “1” if you have at least $1,800 of child or dependent care expenses for which you plan to claim a credit
G Child Tax Credit (including additional child tax credit). See Pub. 972, Child Tax Credit, for more information.
If your total income will be less than $61,000 ($90,000 if married), enter “2” for each eligible child; then less “1” if you have three or more eligible children.
If your total income will be between $61,000 and $84,000 ($90,000 and $119,000 if married), enter “1” for each eligible child plus “1” additional if you have six or more eligible children.
H Add lines A through G and enter total here. (Note. This may be different from the number of exemptions you claim on your tax return.)
This does not include a worksheet you can also do if you itemize.
Some times I hear that people don't feel the change in their W-4 will make that much of a difference. Well, if each year you are getting a $4000 refund from federal. That is over $300 a month that could be added to your take home pay. That is some raise. What would you be able to do with an extra $300 a month? If things are tight in your financial pocketbooks, this is one area you can adjust and have benefit almost immediately. No you won't get a huge refund each year, but then again isn't that why they have savings accounts?
Lastly, one thing from my personal experience. I still claim 1 or 2 less than the federal government suggest, because I don't want to pay state taxes. I found out one year that I still got a federal refund, but owed that amount to the state. What a blow to the gut. So now I get a little bigger, but usually not large refund from federal and a small refund from state. Overall, I would rather have our money today and not a year from today. Just my preference and you are entitled to yours.