So I’ve been asked this one a time or 2 before and I honestly hear different things for different people all the time. The general consensus is “it depends on your financial situation” about 99.99% of the time. Isn’t that how it is with ANY financial question? There’s no “silver bullet” or “one size fits all” answer to most of life’s financial questions, but I’ll try to break it down with a few resources I’ve found.
Hook Me Up With The Refund!
First we might want to debrief on the benefits of getting a big tax return in April and if you fit in this category. As much as it is not for me, it COULD fit your personality and spending style. You may fit in this category if you are a bad saver. This means that you can’t find spare $ to put in the bank each month because money burns holes in your pockets. You’re always wanting the next gadget and can’t find time (or money) to set aside and save for a rainy day.
There is nothing wrong with being a bad saver, you just like to spend, fine. But what I’d recommend is making sure you put some of that money away once you DO get the big check back from Uncle Sam.
Why Wouldn’t I Want A Big Return On Tax Day?
Well, getting a big refund is nice, but having that money throughout the year might be better if you’re good with your money. For the sake of numbers, let’s say you would get $1,000 back from the government after taxes. They’re not paying any interest on that. It is just money that you’re overpaying them in your paycheck each period.
That money is a free loan to them for the year that you’re not using it. They’re putting that wherever they need/want to as free money and then just giving it back at the end of the year. Does anyone think that loaning me $1,000 to have for the year and at the end of that time I give you back just that $1,000 is a good deal? If so, contact me and I’ll be happy to strike a deal with you there.
You’re not only losing out on possible interest that it may accumulate in an MMA or High Yield Savings account, but you’re also losing ground to inflation.
Now take that $1000 that you’re loaning out to Uncle Sam and put it away each paycheck for the year in a CD or MMA and you’re at least making 3-5% and cashing it out in a year at $1050-ish. Not winning the lottery, but put that number in your OWN calculator to see what your scenario would be.
So How Many Should You Claim?
Well the quickest rule of thumb is the more you claim the less you get (or owe). If you claim 0, you’ll get a good chunk of change back at the end of the year. If you claim 7 (you can claim up to 9 if you want), you’ll likely be paying, but that’s not a bad thing if you’re offsetting it with deductions to write-off and mitigate the overall number you’re left with at year end.
Another thing to keep in mind is that adjusting your W4 does NOT change the amount of your tax burden, it just changes when and how you pay it.
I have had the discussion a handful of times and honestly the best reference I have found (as of recent) is over at the IRS.gov website. They have a handy calculator that will help you estimate what you’ve been paying and let’s you determine the best bang for your buck. Be sure to use these tips for using their calculator:
* Have your most recent pay stubs handy.
* Have your most recent income tax return handy.
* Fill in all information that applies to your situation.
* Estimate values if necessary, remembering that the results can only be as accurate as the input you provide.
* Consult the information links embedded in the program whenever you have a question.
* Print out the final screen that summarizes your input and the results, then use it to complete a new Form W-4 (if necessary), and keep it for your records.
Filed Under: Taxes