Adjust Your Tax Withholdings For More Take-Home Pay
Want to quickly increase your take-home pay? Adjusting your tax withholdings could be the answer. I read that around 70% of Americans get a tax refund every year which means they can benefit from adjusting their withholdings to get more take-home pay.
Around the end of the year is a good time to analyze your paycheck to determine whether or not such an adjustment could benefit you. Tax withholdings subtract a big chunk out of your take-home pay so why not spend a few minutes and verify they are still correct? You might be able to adjust your withholdings to increase the amount of your check.
I am not an accountant or tax attorney. This is simply what I do to adjust my tax withholdings. You should check with a competent professional to be sure before making any changes.
Tax refund indicates too high of withholdings
Did you get a tax refund this year? If so, then it is quite likely that you can decrease the amount of taxes being withheld from your paycheck to increase your take-home pay. This is very easy to do, but I’ll get to that in a minute. Let me explain why you need to adjust your tax withholdings.
Tax withholdings are simply prepayments you have to make on your annual income taxes. If you are getting a refund every year, then the amount of your withholdings is too much. You are essentially loaning the government your money at zero interest!
How to check your tax withholdings on your paycheck
Another thing that you can do is to compare your year-to-date tax withholdings to the actual amount of taxes you paid last year. This is not nearly as hard as it might sound and it will give you a pretty good idea about the accuracy of your withholdings.
On your paycheck stub, it will tell you the year-to-date amount of federal income tax that has been withheld from your check. It will also show you how much is being withheld every pay period. How many pay periods are left this year?
You can use this information to estimate your total withholdings for the year as shown below.
Now look back on your most recent income tax return. Find the actual amount of your total tax. On the 2007 Form 1040, this can be found on Line 63.
Compare your estimated withholdings for this year to your total tax from your last return. If your withholdings are higher than your total tax, then you should probably reduce the amount of your withholdings thereby increasing your take-home pay!
How to adjust your tax withholdings
You use a W-4 form to adjust the amount of Federal Income Tax being withheld from your paycheck. You should be able to get one from your HR or payroll department. You can also click here to obtain a W-4 from the IRS web site.
The higher the number of allowances you claim on your W-4, the less tax that is withheld from your paycheck.
The IRS also offers a handy withholdings calculator that you can use to determine the correct entries to make on the W-4. This calculator will walk you through the steps to ensure that you don’t have too much or too little withheld from your check.
Checking your tax withholdings might get you a raise!
Lowering your tax withholdings will increase your take-home pay. It has the same effect as getting a raise! Now is a good time to spend just a few minutes to determine where you stand. You might be pleasantly surprised and wouldn’t a few extra dollars on your check be nice?
A few other articles that might interest you:
50+ Resources to Legitimately Raise Your Income
What’s Your Financial IQ? Here’s A Test
Back To Basics: Establish A Personal Finance Emergency Fund
Where Do You Live?-The Most Tax Friendly Cities In The United States
10 Ways To Improve Your Life Starting Today
Photo by The Consumerist
This is definitely a good strategy. I’m tired of people telling me they didn’t pay any taxes last year…that they actually got their money back instead…
Sheesh.
Then there are the ones that understand they paid income taxes but are happy to get that big refund for the overage.
Dumb.
@Kevin – I imagine that most people are somewhat afraid of lowering their withholdings because they want to avoid having a big tax bill when they file their return.
However, given the economic downturn, many people will likely be more interested in increasing their take-home pay by adjusting their withholdings. I hope this information helps them with that.
Its so much better for us to have more money in each pay check rather than say we got a big tax return. The money is mine and I want to be able to use it now!
Read FFB´s latest article – Personal Finance Resource Links
I think most people like to rely on the forced savings, rather then getting their money back upfront. Most people don’t seem to trust themselves with an extra $500 or whatever the adjustment would be.
I say that I have only about a 10% success rate when trying share this knowledge with people
Read The Happy Rock´s latest article – Community In Action – Giveaway Edition
@FFB – Absolutely! Why let the government hold onto your money when you can bring it home with you?
@Happy Rock – If people want forced savings, then they should adjust their withholdings and then have money automatically drafted from their account into their savings where it will earn interest.
Thanks for taking the time to comment!
[...] Adjust You Tax Witholdings for More Take-Home Pay. A nice reminder as we head into the end of the tax year. One of the fastest ways to increase your take-home pay is to lower the amount of taxes being withheld. If you got a huge refund this year, adjust your witholdings to avoid it this year. Better to owe a small amount at the end of the year than give the government an interest-free loan all year. [...]
[...] Adjust Your Tax Withholdings For More Take-Home Pay [...]
Cool post as for me. It would be great to read a bit more concerning this theme.
Most people do not understand the tax code and thus get overtaxed. The government then has their money until they can get it back after they do their taxes. These are good explanations for those who get a refund each year.
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