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To combat the economic slowdown, President-elect Barack Obama is pressing Congress to have a tax-cut bill ready for him to sign shortly after he takes the oath of office January 20. One way to get more money in workers’ hands quickly would be for the government to simply agree to withhold less tax from everyone’s paychecks.
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One proposal, for example, would let $8,100 in wages escape the 6.2% tax that is withheld for Social Security. That would inject an extra $500 in an employee’s paychecks -- or $1,000 for each working couple -- without involving the time-consuming bureaucracy needed for a re-run of last year's rebate checks.
But here's a happy little secret: Most taxpayers have the power to give themselves a much bigger tax break. And you’re in this group if you're one of the 75% of Americans who get a tax refund year after year. In 2008, the IRS issued nearly 107 million refunds averaging $2,400 (and totaling $256 billion, far more than the tax cut currently being contemplated).
If you're just "average," then, you deserve an extra $200 a month in your paychecks. Habitual refund receivers have every right -- and some might say a patriotic duty to help stimulate the economy -- to order the IRS to take less out of their paychecks.
In other words, you don't have to wait for Congress and a new President to cut withholding. We can show you how to increase your take-home pay starting next pay day.
All you have to do is file a new W-4 form, Employee's Withholding Allowance Certificate, with your employer to adjust the number of allowances you are claiming. You can claim an allowance for yourself, your spouse and your dependents, for example, and maybe some extra ones if you itemize or claim certain tax credits. Each allowance for 2009 basically makes $3,650 of your annual income off-limits for income-tax withholding. Claiming extra allowances on your W-4 will automatically decrease withholding . . . and increase your take-home pay. You'll enjoy instant gratification from a do-it-yourself pay raise.
To give you an idea of how much you stand to gain, we’ve updated Kiplinger's quick 'n' easy withholding calculator. Sure, reducing or eliminating overwithholding means reducing or eliminating the tax refund you’ll get next Spring. But, face it: it makes a lot more sense to get your money when you earn it, particularly in these tough economic times.
Of course you can't just make up a number for your W-4. The IRS has a dense 19-page booklet with seven intimidating worksheets to guide you toward the right number of allowances to claim. The agency even offers a Web calculator to help. But it requires nearly 30 entries.
To make things less painful -- and to encourage taxpayers to set their withholding situation straight -- we've developed a simple, user-friendly calculator. Just answer three questions (you'll find the answers are on last year's tax return), and we'll give you a solid idea of how many more withholding allowances you should be claiming. It's based on the premise that your financial life in 2009 is going to be pretty much the same as the year of your last tax return.
All sorts of things can affect the amount that should be withheld from your check: a new job, a new marriage, a new child, or a new house, to name a few. See Tax Planning for Life Events.
But, if your financial life is shaping up to be pretty much the same this year as the year of your last complete tax return, our calculator will instantly figure how many extra allowances you deserve. And, to give you the incentive to fill out a new W-4, we'll show you how much extra money you'll add to your paycheck by claiming the appropriate number of allowances.
Avoid costly mind games
Most experts who rail against over-withholding and the flood of refunds it unleashes complain about giving the government an interest-free loan. We agree that you're better off steering that cash into savings or investments that make you money. But there's really a bigger issue at play here.
Habitual refunds can play costly games with your mind and short-circuit meaningful tax planning. You've surely heard this joyous springtime comment: "Oh, I didn't owe any tax this year. I'm getting money back."
Of course, the gratified taxpayer probably paid thousands -- maybe tens of thousands -- of dollars in tax and simply recouped funds that had been overpaid. This delusion can inflict financial pain if it leads you to lower your guard to the tax consequences involved when you enter into financial transactions during the year, whether that's deciding which stocks to sell, whether to buy a rental property or whether to transform a hobby into a business.
The prospect of getting money back also can lead to laziness when you work on your return. There's a good chance you'll work harder to shave the amount of extra tax you owe than to pump up an already fat refund.
Try our easy withholding calculator now. If it shows you deserve more allowances -- and odds are that it will -- confirm the number by going through the W-4 instructions. Then file a new W-4 with your employer. You should see the benefit of your labors within 30 days.
Don't Forget to Visit Our Tax Center for More Expert Advice
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