By Amanda Rebmann
April 15th. Tax deadline day. Every year we account for our earnings over the past year and to ensure both the federal and state governments have collected the amounts granted them by law (thanks 16th Amendment!)
Remember- we are a country founded by rather wealthy men who objected to taxation. Times have certainly changed, and I do NOT advocate going to your local IRS with a bucket of tar and a bag of feathers. The old adage is true: death and taxes are certain.
Many people dutifully gather up receipts, interest statements, W2s or 1099s each year, head off to the accountant or online tax service, and hope for the best. A refund is seen as a positive thing; for most people it’s certainly better than owing the government money. I speak from experience- that is never a good feeling, especially if you hadn’t prepared for it. So taxes get filed and you start planning what to do with that refund. Many people use it for vacations, home improvements, an extra mortgage payment, or, like yours truly this year, helping to pay closing costs for a new home.
What may get lost in the euphoria of the money is that it’s not a bonus check for being an American taxpayer- it’s the government giving you back your own money . . . that you’ve allowed them to borrow interest-free. Many people aren’t aware that you don’t have to.
There are ways to estimate how much you actually will owe in taxes before you pay them. If you make a salary or know how much you will be making in a year, this can be very easy. It does become more complicated if you’re self-employed, seasonal, or make commissions or tips. There are online calculators, one on the IRS website, or simply fill out a sample 1040 to determine your yearly tax amount due.
Once you determine that amount, you can adjust how much your employer withholds from your paycheck in taxes. When you start a new job, one of the documents your employer has you fill out and sign is the W4. It establishes how much of your paycheck is automatically sent to the government each pay period. If you need to adjust this amount- increase it to avoid owing taxes or decrease it to avoid receiving a refund, you may do this at any time, not just when you start a job. Altering your W4 will change the amounts taken for your “Federal Income Tax” or “Federal Withholding.”
The opposite works too. The self-employed, or people receiving 1099 income (no taxes deducted), can be faced with a large tax bill due April 15th. To avoid having to deal with the IRS if you do not have the enough saved to pay, you can estimate how much in taxes you will owe, than divide that into smaller amounts you can set aside during the year- for instance, monthly or biweekly.
Whether or not to adjust withheld tax amounts depends on the person and circumstances. By only having the correct amount withheld, you have more personal control over your money- theoretically, more money in your paychecks. But a lot of us like that nice direct deposit showing up in our bank accounts every year. It’s like a free, little savings account . . . that you don’t make any interest on. But, much like a trip to the grocery store with a garbage bag full of empty bottles for a deposit refund, it does feel like “new” money, doesn’t it?
