Rethinking Your Tax Strategy
April 2021
Hi ladies,
Since today is traditionally what we know as Tax Day, I thought it would be fitting to share my thoughts on honing a tax strategy that allows you to keep more of your hard-earned money throughout the year.
Go for Zero: Rethinking Your Tax Strategy
Getting a big tax refund from the IRS is pretty nice, right? You can always find a use for that money, whether it's a big-ticket purchase, paying off debt, adding to your savings, or investing it. But, by getting that big refund every year, you're missing out on using that money throughout the year.
If federal taxes are being withheld from your paycheck and you receive a sizable refund just about every year, your withholding amount is likely too high. When you get a big refund, you’re mostly getting your own money back. And while receiving a refund each year is satisfying at the time, you’re actually losing money on the deal because the IRS gets to use your money for most of the year, without paying you any interest.
Think of it this way: take this year’s tax refund and divide by 12. That’s a ballpark figure of how much extra cash you could see in your paycheck every month. With this extra money, you could increase your contributions to your retirement plan, invest in a tax-deferred 529 plan for your children’s or grandchildren’s education, increase your savings, make home improvements, or buy something you have wanted for a long time.
On the flip side, you don’t want to get hit with a sizable bill from the IRS either. What you really want is a tax balance of exactly zero. If you manage your withholding amounts correctly, you can ultimately get a little more in your paycheck and not need to write a check to Uncle Sam.
Making the change
If you always get a big refund and you would rather have that money in your pocket every month, or if you usually need to pay in, you should review your Form W-4. The changes made by the Tax Cuts and Jobs Act of 2017 were incorporated into the new form issued in 2020. You may find that the changes to how allowances are calculated are beneficial to you. If you need help, the IRS has a withholding calculator that can help you figure out your ideal withholding amount.
Other things to consider…
If you have additional sources of income, say from freelance work, you may need to evaluate how much you are paying in taxes each quarter to make sure you get the tax liability just right.
It’s also a good idea to review and adjust your withholding when:
either you or your spouse has more than one job
you have children, get married or divorced, or buy a home
Until next time,
Jen
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