Welcome to the this week's Women's Money Week Action Step. Before you get started, we recommend that you read this post about getting started with Women's Money Week.
About This Week's Action
"Taxes, didn't I just finish dealing with those for the year?" is probably what you'll ask yourself when I mention that this week's take action step deals with taxes. And while April 15 does seem like just yesterday, the reality is that it's already halfway through the year and it's time to ensure that your tax payments are on tract. So, this week's action is to check your tax withholdings and adjust them as needed.
Why Take This Action
You'll Take Back Control (and Prevent Surprises)
The most important reason to check your withholdings is to prevent any surprises when it comes to tax time next year. Most people overpay their taxes and get a refund - but wouldn't it be nice to be able to plan on getting a refund and know how much it will be? Or for the unprepared, there is nothing worse then finding that you owe taxes when you didn't expect to. Even if you are fairly certain of what your taxes will look like 10 months from now, an empowering step in regaining financial control is to know exactly what your tax numbers are.
You'll Have More Money in Your Pocket Now
For those that choose to be precise with paying your taxes (not having to owe taxes or receive a large refund), by checking and adjusting your withholdings you may end up with up to a few hundred dollars extra in each paycheck. The last time I checked my withholdings I was overpaying and when I adjusted the number of exemptions with my employer I had a over $100 added to each paycheck.
How Long Does This Action Take?
Checking your tax withholdings with a withholdings calculator will take about 20 minutes. Adjusting your withholdings (as needed with your employer) will take about 10 minutes.
How to Check Your Tax Withholdings using a Calculator
1. Decide Whether or Not You Want a Tax Refund
There's a big debate in the personal finance community about whether or not you should get a tax refund. Some experts, like Suze Orman, argue that by getting a large refund you are stupidly giving the government an interest free loan. (See for example, this article: Why I Hate Income Tax Refunds)
On the other hand, there's an argument that getting a lump sum payment is actually a great way to force yourself to save. Come April, you have a nice chuck of money that you can save or spend as you see best. (See for example, this post: Your parents are delusional about tax refunds).
Frankly, I don't think that all tax refunds are bad, but I don't think that a big refund is best for everyone. What matters most is that you make a conscious decision -- decide whether or not you want a refund. In the past few years I have had years that I preferred to not get a refund and years that it made more sense to have an extra savings plan built in. On a year I was shooting for precision and come tax time I only owed the government $7.
Generally, I think if you are 100% on top of your finances and have a stable income and no debt, you probably shouldn't get a refund. But if your income fluctuates and you would most likely just needlessly spend a few extra dollars in your pocket each month, then a refund might be a better bet. But make the decision that is right for you.
The bottom line is decide whether or not you'd like a to receive a tax refund next year and approximately how much you'd like it to be.
For further reading consider the comments in this article: Are You Still Getting a Tax Refund?
2. Get Your Most Recent Pay Stub
Go rummage through your desk or search your work email and find your most recent pay stub.
3. Run Your Numbers on the IRS Withholding Calculator
The IRS Withholding Calculator requires a lot of information. I almost would recommend a simpler tax calculator just to avoid inflicting pain on you, but the reality is that the IRS's calculator is the most accurate and most helpful calculator that exists. So visit it on the IRS website here and fill it out.
On the last page of the calculator you will get your results. It will tell you if you've overpaid to date or are underpaying. If you are overpaid and happy overpaying - then no need to adjust. But if you want to be more exact and get less of a refund, then adjust your withholdings as the calculator suggests.
4. Adjust Your Withholdings with Your Employer
If you need to adjust your withholdings, contact your HR department and let them know the number of exemptions you want going forward. You may have to fill out and sign a very short form, but it won't take long.
You've made it this far! Now that you know what this week's action is, why to take it, and how to take it, you should commit to taking action. To commit to taking this week’s action, you could simply just tell yourself you're going to follow the steps in the how section.
But what are the chances you are actually going to find the time to do this, when you have so many other things to do? Instead, you should commit and hold yourself accountable. To hold yourself accountable do 3 things:
- Leave a comment below answering the question: Do you like getting a tax refund? Will you adjust your withholdings through the end of the year or leave them as they currently are?
- Sign up for the week by registering here. When you "register" for this week's action on Eventbrite (totally free) it allows us to easily email you twice during the week to help hold you accountable. (If you want to know why you should do this, read this post.) We'll email you twice during the week to remind you to take action and run your numbers on the withholding calculator.
This post was included in the Carnival of Personal Finance.