Tweaking Your W4

Posted by Mike Smith :: December 14, 2007 @ 5:45 am

In his article entitled 5 Ways to Maximize Your Tax Savings Now, Marshall Loeb started out by suggesting that you can get part of your tax refund early by filing a new W4 with your employer to reduce your deductions.

If you are one of the majority of taxpayers that normally gets an income tax refund each year, this is a simple method to get a boost in your paycheck towards the end of the year. The extra money that you get now will obviously reduce the amount that you get back as a refund later, but it may help you to avoid using credit cards to fund your holiday purchases. Of course you could also use a P2P loan from Lending Club for this purpose.

When it comes to income taxes, some people like a big refund. They see it as a sort of automated savings plan because the money is taken out of each paycheck before they see it, so they don’t really miss it. If you’re in this group, consider increasing your 401K contributions or enrolling in an interest-earning automatic savings plan. On the other extreme, some people pay estimated taxes on a quarterly basis. I do this to cover any expected tax on capital gains from investment sales as well as self-employment taxes.

In an ideal world, everyone’s income tax refund would be zero. That would occur if they paid just the right amount of taxes during the year. Owing too much at the end of the year could lead to penalties, while getting a big refund allows the government to use your money during the year interest-free instead of putting it to your own good use.

If you do file a new W4 to reduce your deductions for the rest of the year, be sure to change things back at the beginning of next year. Failure to do so could leave you with a large tax bill at the end of next year.