At payday, many of us begin budgeting from our net pay. We often neglect to consider how we can make adjustments to increase our take home pay or even review what is actually being deducted. As a result, we may settle for certain taxes, deductions, and other payments which may not benefit us at all.
Do you know you can increase your take home pay by making necessary adjustments to your tax withholding?
Check your allowances
S1, S2, or M3 – what does it all mean? Your tax deductions depend solely on the information you provide to your human resources department via your W-4 form. This form determines the amount of taxes to be deducted from your check. If you withholding too much, you should increase your allowances. For example, if you currently claim S1 (single and one allowance) or M1 (married and one allowance), you should increase the number of allowances to reduce the amount of taxes being withheld from your paycheck.
Don’t let the government use your money interest free
Now keep in mind, the number of allowances does not have to necessarily equal the number of exemptions you claim on your tax return. As a matter of fact, to get the most of your money it should probably be more! Why is that? Because at the end of the tax year, it is advantageous to break even instead of getting a refund. Think about it, if you are getting a tax refund year after year, you are essentially allowing the federal government to hold your money and give it back to you interest free! Consider making adjustments to your allowances and utilizing the money to pay down debt, save, or invest. Isn’t that a better use of your money?
There is an app for that
Before you head over to the human resources department, take a moment to determine the correct amount of taxes you should deduct. Be careful! Make certain you do not underestimate your tax liability, this could potentially lead to additional penalties and interest. There are many sites, tools and apps available to help you. A great way to determine the correct withholding tax is to use the IRS withholding calculator. This withholding calculator allows you to enter your projected income and deductions to determine the correct number of allowances to claim in order to break even at year-end.
Remember, your choice, your future!
Kemberley Washington is a certified public accountant and a business professor at Dillard University. Follow her on Twitter or subscribe to her blog at kemberley.com.