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Health & Fitness

How to Increase Your Monthly Income - NOW

Make use of proper federal tax withholding to increase your NET earnings.

Here's a quick tip for you. This tip may increase your NET (after deductions) income by a sizable amount each month.

THE TIP: Withhold only the appropriate amount for federal taxes from your paycheck.

As a bankruptcy lawyer I see tax over-withholding far too often. I review a person's income tax returns and see sizable tax refunds into thousands of dollars each year.

The refund is not a gift from the IRS. The refund is actually the amount of money you overpaid to the government through paycheck withholding. It's money you should be getting every paycheck instead of in a lump sum come tax season (without earning any interest on it).

So, how do you reduce those tax refunds? Read on.

Figure Out Your Actual "Tax Liability"
Generally, if you have earnings you must pay taxes. The amount of taxes you have to pay is called your "tax liability." Unless you've had a significant change in circumstances (you make more money, less money, change in dependents, etc...) your tax liability will be pretty much remain unchanged from year to year.

The best way to figure out your tax liability is to look at last year's federal tax returns. On the 2012 Form 1040, you can find your tax liability on Line 44. If your circumstances will remain unchanged for the following tax year, it is safe to use this number as a general estimate for next year's tax liability.

Of course if you have an accountant, she should figure this out for you. Or you can simply calculate your estimated tax liability for the tax year anew.

Note: Don't forget to incorporate any income tax credits such as the Child Tax Credit and Earned Income Credit that you may be entitled to. These credits will lower your tax liability - sometimes significantly.

Figure Out The Appropriate Federal Withholding
You control the amount your employer will withhold from your paycheck by making withholding allowance elections on Form W-4.

Often, people complete this form and fail to update it as circumstances change resulting in excess withholding.

Here is a link to the form: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CC0QFjAA&url=http%3A%2F%2Fwww.irs.gov%2Fpub%2Firs-pdf%2Ffw4.pdf&ei=tGu3UYSMLOKsywGy04CQCw&usg=AFQjCNHdJoiSxm8m_ff8SZ6jMDWjFVFBMQ&bvm=bv.47534661,d.aWc&cad=rjt

The W-4 has instructions to help you elect the proper withholding allowance.

Or you can go to the following website and calculate the proper withholding allowance: http://payroll.intuit.com/paycheck_calculators/ 

This website provide you with a general estimate of your withholding in dollars per paycheck. This dollar amount, when annualized, should roughly approximate your actual tax liability. It's generally better to withhold a little extra just so you don't have to write a check to the IRS come tax time.

Increase Your NET Income Now by Reviewing Your Federal Withholding To Date
The year is half way over. Go through the above steps to see if you have already withheld enough from your wages to satisfy your 2013 federal tax liability.

If so, you should stop or reduce your withholding for the remainder of the year. Reducing federal withholding will automatically increase your NET paycheck by the same amount. If you do this, don't forget to fill out a new W-4 in 2014 and elect the appropriate allowance for your 2014 tax liability.

The Benefits of Appropriate Federal Tax Withholding
Reducing excess withholding will have the following benefits:

  1. The money stays in your pocket and not government coffers.
  2. You can make immediate use of the money to catch up on bills, to create an emergency fund, or simply invest the money. Remember: the government does not pay you interest on over-payments. Your refund consists of exactly the same amount you over-paid.
The Disadvantages of Appropriate Federal Tax Withholding
Some people simply like to receive a sizable federal tax refund. Maybe it's because they don't have the disciple to save a chunk of money on their own?

But I believe the most common reason is HABIT. Some people just got used to getting a refund every year. While others may not be financially sophisticated enough to understand why they are getting a tax refund in the first place. 

In any case, here are the "perceived disadvantages" of appropriate federal tax withholding:
  1. If you are not disciplined enough to put away the money into a savings account you will spend it as you earn it and will no longer have a nice chunk of change to look forward to come tax season.
  2. Figuring out the appropriate withholding takes a little bit of effort each tax year. So you're actually taking time away from your busy schedule to do this.
  3. You may have to fill out a new W-4 as your circumstances change. Once again, this takes a bit of effort and a trip to your payroll department.
This is for Federal Tax Withholding Only
Don't mess with state returns. This advice is for federal tax withholding only.

In Summary

Think of the tax refund as a free loan you are making to the government that is paid back to you every tax season.

If you withhold the proper amount to satisfy your tax liability than your NET paychecks should increase making more of your earning available to you RIGHT NOW. You won't have to wait until tax season to get your money.

You can invest the extra cash and start earning interest right away. Or use it to catch-up on bills, etc... 

If you don't have the discipline to save the money you normally over-withhold, make sure you withhold enough to completely satisfy your tax liability. So, err on the side of over-withholding - but just by a little. This way you won't have to write a check for the tax liability that wasn't covered by withholding.

Contact Me
If you don't have an accountant, or need more help grasping this concept, don't hesitate to post a reply or contact me: http://chicagobankruptcyguy.com/


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