Tax time is upon us and unfortunately we have to watch those dancing tax people for another three months. Which brings me to my next topic, taxes and how it can save you money.
Not everyone, but most people work for a company that takes taxes out of your paycheck. You are responsible for telling your company how much to take out and at the end of the year you find out if you have over or under paid. If you have paid too much you get a refund and if you underpaid you obviously owe. Some purposefully overpay and consider this there yearly bonus. But, that is far from the truth.
Disclaimer: I am in no way claiming to be a tax professional.
A lot of people are throwing money away when it comes to the way they set up there W-4. The W-4 is the form that determines how much Federal, State, Local, Social Security, and Medicare tax is withheld from your paycheck.
The government is happily holding this money for you in an account were they themselves are making interest on YOUR money. The key to taxes are that you want to pay enough with every pay check where you do not owe at the end of the year and you get as little of a refund as possible. This way you know that you were in control of your money throughout the year.
You might be asking well how would this save me money. Think about any debt you have where you are paying a high interest rate based on your yearly balance. The money that you are letting the government hold could be used towards paying down these debts. Which, would save you money on the interest.
Say you are just making enough every paycheck to make ends meet. This could mean the difference between being able to pay your bills or having to use credit cards to pick up the slack. You could say, “well, I will just use my tax return to pay that credit card debt off at the end of the year”. But, it would be too late. You could have already paid hundreds of dollars in credit card interest.
For the people that have a hard time saving and use the government as a savings account. You have the opportunity to save it yourself and keep the interest you earn on YOUR money. You have worked so hard for it, why not let it work for you. I know interest rates are not great right now but I promise it adds up. Think if you earned $10 a year in interest. In about fifty years when you hopefully go to retire you will have earned $500 just by making this small change.
If you do not know how many allowances you should claim on your W-4 for 2014 you could always ask the tax professional while they are doing your 2013 taxes. If you do your own taxes then see how much your refund is this year and make small adjustments every year until you get it right. For example, if you get a large return this year, you could add one allowance each year until your return is under $500.
Small ¢hanges that make big difference$.