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Debt Management

Check Your Tax Withholding

If you are paid as an employee and have taxes withheld from your paycheck, you will complete a W-4 form as part of your new hire paperwork.  The W-4 form is a worksheet that establishes how much your employer is to withhold in estimated federal income taxes on your behalf, based on your response to certain questions. How do you know if you need to revise your W-4 form? If year after year, you receive a refund when you file your income tax, it is an indication that you are having too much money withheld from your paycheck.

For example, let’s say that this year after filing your income tax, you received a refund of $3,000, which means you over-paid your taxes. To determine how much you over-paid in income tax throughout the year, divide the $3,000 refund by 12 to get a monthly amount you are over withholding.  You would then determine that based on the previous W-4 you submitted to your employer, you over paid (over-withheld) an additional $250 every month.  By recalculating the amount withheld from your paycheck, completing a new W-4 form, and submitting to your employer, you can have an extra $250 in your monthly take home pay throughout the year.  For anyone struggling to pay off debt, or wanting to increase his or her savings, this can be a way to increase the cash you have available every month. If you have a similar type of situation, you may want to reset your tax withholding to keep more of your income in your pocket each pay period.

To help you determine how much to adjust your withholding, use the withholding calculator found at http://www.irs.gov/individuals/article/0,,id=96196,00.html.  Keep in mind that by increasing your withholding exemption, you will decrease the amount of tax withheld, which will result in a smaller tax refund. 

For assistance with adjusting your withholding, check with your financial coach to schedule a time to discuss how to complete a new W-4 form.

There is little incentive to overpay your income taxes when you consider that when you do, you are providing an interest free loan to the IRS.  When you take the time to review your W-4 withholding, you will find that you can reduce the amount withheld monthly and maximize your take home pay. If you are making payments on your debt, the increase in cash flow that occurs when you have your withholding adjusted can allow you to pay down your debt more quickly.