Nickeled and Dimed

If this is your first time visiting Centsability to Wealth you may want to see what we are about , read about me, or read our introductory post.

In a continuation from yesterdays tax theme, today we are going to talk about tax withholdings.  Tax withholding allowances are determined when you fill out your W4 at work.  Depending on the number of allowances you claim (as well as other factors), a certain amount of money will be withheld from every paycheck to be used as a pre-payment on your taxes.  At the end of the year, when you fill out your 1040, you tell the government how much money you made, how much money you paid in taxes, and it is then determined whether you owe more money or will be getting a refund.

As I said yesterday, I received about a $2,000 rebate this year.  While it is exciting to get a large lump sum of money like that, what it really means is that I gave the government an interest free $2,000 loan.  Hey, Im all for patriotism, but handing out loans interest free is something I’m not interested in doing.  Due to the time value of money, I would have been better off financially to receive that $2,000 in my paychecks throughout the year.

So how do you make sure you aren’t paying more in taxes throughout the year than you should be?  By increasing your withholding allowances on your W4.  The process for doing this fairly simple.

Your first step is to use the IRS withholdings calculator to determine the number of withholdings you should be claiming on your W4.  After filling out the required information (your salary, your taxes withheld so far, your deductions, etc.), you will be given a suggested number to claim on your withholdings.  Simply call the Human Resource department at your company and tell them you would like to make some adjustments to your W4.  After the changes are put into effect, you should notice a decent increase in your paycheck.

The IRS recommends the following steps in implementing this plan:

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.

I know it is fun receiving that fat refund check each year, but a dollar is always more valuable today than it is tomorrow.  Instead of giving the government and interest free loan, increase your own paycheck and either invest the extra money or use it to pay off debt.  Either way you will be getting a much better return on your investment than the  0 percent you get from the government every year.

Please continue sending any personal finance related questions, suggestions and tips to centsabilitytowealth@gmail.com.

Technorati Tags: tax, personal finance, time value of money, IRS, money

If this is your first time visiting Centsability to Wealth you may want to see what we are about , read about me, or read our introductory post.

I filed by 2008 tax return yesterday, and I’ll be getting a refund of about $2,000!  This will allow me to pay off a large chunk of debt and help get me back on track after the forced two week unpaid vacation at work.  And thanks to the the free E-filing you can get on the IRS’s website, I was able to save a couple hundred dollars and file the return myself for free.

Being an accountant, it’s pretty easy for me to file my own taxes.  Is this a realistic option for you?  It depends on your situation.

According to Consumer Reports, you should weigh the amount you will save against the hassle required to file your own taxes.  Here are some questions to ask yourself to determine both how much you will save and how difficult it will be to do your own taxes.

How much will you save- If you have a pretty basic return and go to somewhere like H & R Block, you are probably looking at a cost of somewhere between $100 and $300.  For those with a more difficult return or those who prefer to go to an actual CPA firm instead of just a seasonal tax place, you could be looking at $100 to $300 per hour.

In order to file your own taxes, you are looking at a cost between $0 and $60.  If you make less than $56,00 in adjusted gross income, you can e-file your taxes online for free.  If you make over that amount, your best bet is to spend between $30 and $60 to buy tax software such as Turbo Tax. 

How difficult will it be for you to do- Here are some questions that will help determine how difficult it will be to file your own taxes:

• Do you use the standard deduction, or do you itemize deductions?- The standard deduction is a $5,700 deduction from your adjusted gross income and is given to everyone (if you don’t itemize your deductions).  Itemized deductions are used if their total adds to more than the standard deduction.  The largest itemized deduction is the interest paid on your mortgage.  This alone will often add up to more than the standard deduction.  Other itemized deductions could include charitable donations, parts of health bills, state and local taxes and other misc. deductions.  If you itemize your deductions, it will typically be more difficult to do your own taxes.
• Do you have taxes automatically withheld from your pay?- If you work for a company and draw a salary, you almost certainly have taxes automatically withheld from you and will receive a W2 each year telling you how much you earned and how much you paid in taxes.  If you are self-employed or paid “under the table”, you will have to figure these things out yourself and doing your own taxes will be much more difficult.
• Do you rental properties or any other kind of large investments?- Rental properties and other large investments can be very tricky with taxes.  If you have these you should probably use a professional tax preparer.

Based on this criteria, here is Consumer Reports summary of whether you should file your own taxes:

The bottom line. Software makes it relatively painless for even math-phobic folks with straightforward tax situations to prepare their returns. If you don’t have the patience to spend the time at your computer, you might prefer to hire a pro to do the job. Or you can pay a tax preparer one year, then do it yourself with software the next, assuming that your income and deductions are similar. If the results are comparable, you might feel comfortable enough to continue doing your own taxes unless your financial situation changes.

Filing your own taxes can be a great way to save a couple hundred bucks, but it is something you want to be careful with.  Tax frued is no joke, just ask Wesley Snipes.  If you are going to do it yourself make sure you have all the proper documents and are inputing 100 percent accurate information.  There are three rules when dealing with the IRS:

1. Documention
2. Documention
3. Documention

 

Follow that rule and you will minimize the risk of being audited.

Please continue sending any personal finance related questions, suggestions and tips to centsabilitytowealth@gmail.com.

Technorati Tags: personal finance, taxes, money, IRS