Big Return, Big Reward? (Not so fast…)
A popular phrase “Go big or go home!” describes a champion’s lifestyle with an attitude of all or nothing. Grammarist.Com further defines this American idiom as:
Go big or go home is an exhortation to go all-out, to put all of one’s effort into an
enterprise, to experience something to its fullest, to be extravagant. Go big or go home is a philosophy that encourages one to be bold.
When it comes to tax refunds, many American’s apply this same philosophy come tax time. By applying the lowest deductions and anticipating a big check from the IRS, many people plan all year for an annual shopping spree, new car, or ultimate vacation with the money they anticipate after April 15th. In fact, the average Federal tax refund for 2015 was approximately $3,100. Another calculation puts the cumulative returns at almost 40 million refunds worth nearly $125 billion dollars! While a tax refund is a light at the end of the tunnel for many tax payers, essentially the refund itself is money overpaid during the course of the year. To be clear, that money was yours all along and the IRS is just holding it for you…interest free.
Of course, there are two sides to every story and other tax payers opt to pay taxes at the end of the year and hold on to more of their money. By owing taxes come tax time, a minimal amount of money has been sent to the government throughout the year. The primary benefit of this approach is to grow this money with an interest-accruing, preferably with an interest rate yielding consistent, steady gains.
Which tax planning strategy is the right one? Well, that depends on financial habits. A couple of questions to consider when deciding between strategies:
- Do I manage money, track expenses, have an emergency fund, and budget responsibly?
- Do I save money regularly and rarely tap into the savings account?
- Do I have the financial discipline?
If the answers are yes to the above questions and you are interested in getting more money back into your pocket, then it all comes down to the W-4. The form W-4 is the form you fill out at the start of a new job and tells your employer how much of your paycheck to withhold for Federal taxes. Through claiming exemptions for dependents, paying for childcare, having a non-working spouse, and having only one job, essentially the more exemptions you have the less money being withheld. Keep in mind that if you don’t withhold enough from your paycheck, you end up owing taxes.
On the contrary, single with no dependents allows for fewer allowances and more money your employer will withhold from your paycheck. If you withhold more than is necessary, your paycheck will be less on payday, but you will likely get a refund come tax time.
Common lifestyle changes like getting married, starting a second job, having a baby or adoption, and new child care expenses are all good reasons to adjust the number of paycheck allowances. While families may be able to save more on their taxes than a single person, taking advantage of every deduction you are entitled to is key. It’s easy to change your W-4 and adjust withholding at any time during the year to avoid having too much or too little withheld. There are a couple of options available to make changes including the antique way of walking through the paper worksheets and taking them to your employer. An even easier way is to use the TurboTax W-4 Withholding Calculator to determine your allowances by answering the questions and the withholding amount is calculated for you. By adjusting withholding effectively, taxpayers can claim the refund ahead of time in installments and not overpay in the first place.
– By Susan Amsler
February 10, 2017
If you need assistance, look no further than
Randolph Business Resources, LLC.
Our experienced staff is ready to lend a hand to you and your business.
Visit us @ www.randolphacctg.com
Call us at: (615)202-5829 if you need immediate assistance