The New W-4: 2020
Adjusting Income Tax Withholdings From Your Paycheck
While it is always a great relief to find oneself in a refund position at tax time, it may not be the best situation for your long-term financial goals. Being in a refund position essentially means that you have overpaid your income taxes for the entire year. Stated a different way, you have provided an interest free loan to the federal (and state, depending upon the one in which you live) government. As your fellow citizen of this great county, I doff my cap to you!
I contributed to an article that listed four great ways for taxpayers to utilize their refund, including paying down student loan and credit card debt. However, it is my opinion that it would be more effective to pay down your debts throughout the year. How wold one do this? Have less withhold from your paycheck, so you can use the extra money to pay down debt. This will result in smaller refund, but it will give you the funds earlier to pay down debt. After all, the more credit card or student loan debt you have outstanding at any given time, the more interest you will have to pay on it. That is Time Value of Money 101.
For wage earners, refunds are impacted by the amount that is withheld from their paycheck. In 2020, the IRS changed the Form W-4, the form you file with your employer indicating how much should be withheld from your paycheck. Rather than claiming allowances, taxpayers are now encouraged to calculate their earnings more accurately based upon other factors. You can find a link to the IRS’s Tax Withholding Estimator here. You will need to have a copy of your prior year income tax return, recent pay stubs, and other related tax and income information in order to complete this accurately.
If you are meeting with your CPA or tax preparer over the next few months, make a note to add this topic to the agenda. Depending upon your unique financial situation, doing so may get your money into your hands sooner rather than later.
About the author:
JP Geisbauer is a Certified Public Accountant and a Certified Financial Planner ®. He is the founder of Centerpoint Financial Management, LLC, a retirement planning, investment management, and tax planning firm located in Irvine, CA. If you have specific questions regarding your situation, please schedule a complimentary 30-minute call here.
Disclaimer:
This article is for general information and educational purposes only. Nothing contained in this article constitutes financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article, please consult with your financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.