Once You Finish Your Taxes, Change Your Withholding
Your taxes are filed and done. Victory dance?
Actually, hold on. There’s one more step you should take.
Before you X out of this window and head off to get a frustration cupcake, let us just tell you about this step, which will save you either money, stress or both.
It’s taking another look at your withholding.
Your withholding is the amount of money that comes out of your paycheck every month to cover your taxes. By taking taxes a little bit at a time, the government makes your tax bill much more palatable. Imagine if you had to save up and pay your whole tax bill all at once? Not fun.
But really, your withholding is based on an estimation of what you’ll owe in taxes. If you’re familiar with the way credits, deductions and exemptions work, you know that many factors affect your total tax bill. When you do finally sit down to calculate your taxes, the reality could be far off that estimate.
The big goal is to get your withholding as close to your actual tax bill as possible. We’ll tell you how to get there.
(By the way, if you are self-employed, there is an equivalent to withholding you should know about.)
If you got a refund larger than $1,000 …
That means your withholding was too high. You might have really enjoyed getting a big check from the government, but it isn’t the smartest financial decision. Let’s say you got a refund for $3,000 (close to the average refund). That means you gave the IRS $3,000 too much in what amounts to an interest-free loan. You could have had that money in your retirement account instead. Even if it only grew by 1% in a savings account, that is $30 you missed out on.
Now, some people use this as a way to save money. We get it! But a better way would be to set up automatic transfers from your checking account to a savings account, which accomplishes the same thing without getting the IRS involved.
If you owed taxes …
That means your withholding was too low, and you got a nasty surprise. (If you owe taxes that you can’t afford, read this post on what to do.) There’s no need to explain why this isn’t ideal! You just got an unexpected bill that might come out of your savings—or add to your debt.
If your withholding was accurate …
You still want to take a look at it if one of these things happened last year or will happen this year:
- You got or will get married
- You got or will get divorced
- You had or will have a child
- You or your spouse changed or will change jobs
- You purchased or will purchase a home
- You got hit with the Alternative Minimum Tax (or if you think you will get hit with it because you got a raise; this tool from the IRS can help you figure that out)
- You got or will get a windfall, like prize-winnings or a lot of income from investments