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If you’re one of the 75% of Americans who get a tax refund year after year, we can show you how to increase your take-home pay starting next pay day. With the holidays around the corner and the market in recovery, who couldn't benefit from extra cash?
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To help you do just that, we’ve come up with Kiplinger's quick 'n' easy withholding calculator. The goal is a simple one: To help you match withholding from your checks to what you'll actually owe in taxes. Sure, we all love our Springtime refunds, but it makes a lot more sense to get your money when you earn it.
All you have to do is file a new W-4 form, Employee's Withholding Allowance Certificate, with your employer to adjust the number of allowances you are claiming. You can claim an allowance for yourself, your spouse and your dependents, for example. Each allowance for 2008 basically makes $3,500 of your annual income off-limits for withholding. Claiming extra allowances on your W-4 will automatically decrease withholding . . . and increase your take-home pay. You'll enjoy instant gratification from a do-it-yourself pay raise.
Kiplinger's user-friendly calculator
Of course you can't just make up a number for your W-4. The IRS has a dense 19-page booklet with seven intimidating worksheets to guide you toward the right number of allowances to claim. The agency even offers a Web calculator to help. But it requires nearly 30 entries.
To make things less painful -- and to encourage taxpayers to set their withholding situation straight -- we've developed a simple, user-friendly calculator. Just answer three questions (the answers are on last year's tax return), and we'll give you a solid idea of how many more withholding allowances you should be claiming. It's based on the premise that your financial life in 2008 is going to be pretty much the same as in 2007. All sorts of things can affect the amount that should be withheld from your check: a new job, a new marriage, a new child, or a new house, to name a few. See Tax Planning for Life Events.
But, if your financial life is shaping up to be pretty much the same this year as the year of your last complete tax return, our calculator will quickly figure how many extra allowances you deserve. And, to give you the incentive to fill out a new W-4, we'll show you how much extra money you will put back in your paycheck by claiming the appropriate number of allowances.
Avoid costly mind games
Most experts who rail against over-withholding and the flood of refunds it unleashes complain about giving the government an interest-free loan. We agree that you're better off steering that cash into savings or investments that make you money. But there's really a bigger issue at play here.
Habitual refunds can play costly games with your mind and short-circuit meaningful tax planning. You've surely heard this joyous springtime comment: "Oh, I didn't owe any tax this year. I'm getting money back."
Of course, the gratified taxpayer probably paid thousands -- maybe tens of thousands -- of dollars in tax and simply recouped funds that had been overpaid. This delusion can inflict financial pain if it leads you to lower your guard to the tax consequences involved when you enter into financial transactions during the year, whether that's deciding which stocks to sell, whether to buy a rental property or whether to transform a hobby into a business.
The prospect of getting money back also can lead to laziness when you work on your return. There's a good chance you'll work harder to shave the amount of extra tax you owe than to pump up an already fat refund.
Try our easy withholding calculator now. If it shows you deserve more allowances-and odds are that it will-confirm the number by going through the W-4 instructions. Then file a new W-4 with your employer. You should see the benefit of your labors within 30 days.
Don't Forget to Visit Our Tax Center for More Expert Advice
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