How can i increase my tax refund
How to Change Your W-4 Withholding to Maximize Your Tax Refund
Ed Note: When you started your job, how much thought did you put into filling out form W-4? Did you know that your W-4 withholdings directly impact your tax refund. January is a great time to revisit your W-4 and make a few adjustments (you can do this at any time during the year — but the earlier in the year you make changes, the more impact they’ll have on your tax refund).
We’re thrilled to have the famous JoeTaxpayer with us today to share a few tips & strategies for changing your withholding to maximize your 2013 tax refund .
You see a W-4 recently? Do you even remember what Form W-4 is? It’s possible that you filled out this form and gave it to your employer years, perhaps decades ago, and never gave it a second thought. Form W-4, otherwise known as the Employee’s Withholding Allowance Certificate. is the form you use to tell your employer’s payroll department how much federal tax to withhold from your paycheck. Sounds simple enough, and the resulting number this form will produce is a single number of allowances – and that number, in turn, determines how much is withheld from your income for the year.
To figure out this one number, you’ll need to go though of bit of work. First, you add up the number of dependents you have, as each one will give you an exemption, i.e. a deduction of $3800 off your income. You then need to review those items that are part of your Schedule A. itemized deductions. These include the usual suspects: mortgage interest, charitable contributions, state income tax, etc. As you add these deductions up, every $3800 worth of deductions will result in one additional allowance. In a sense, this form asks you to project out the data you’re going to use when filing next year’s tax return. For most people, the prior year’s numbers are a great start. It’s simple to look at that tax return, and see if you anticipate any changes — perhaps you’ve welcomed a new child into the family, or bought a new house, which would change
the value of your deductions.
Now, here’s where it gets tricky. You’ve calculated the number that should put your withholding at the exact amount of tax you expect to pay. But what if you missed a bit of income, dividends on stock you own, or a gain for shares you decide to sell in the upcoming year? It may be okay to owe a bit of tax with your return, but there are rules to avoid a penalty. In general, you’ll avoid a penalty if (a) you owe less than $1000, or (b) you’ve paid 90% or more of your total tax bill for the year, or (c) you’ve paid at least 100% of the tax you paid last year.
Let’s get to the issue at hand, maximizing your refund. If you’re one of the people who dread writing a check to Uncle Sam in April, and would rather see a refund, it’s simple to lower your allowances from that calculated number. If you are in the 15% tax bracket. you’d find that lowering the number of allowance by 1 will increase the amount withheld from your paychecks by about $570 (i.e. 15% of $3800) over the course of the year.
If you are in the 25% bracket an increase or decrease in the number of allowances claimed will change the tax withheld by about $950 for each allowance. One allowance claimed is simply you telling your payroll department to not tax $3800 worth of your income over the year. Thus, the impact on the tax withheld is $3800 times your marginal rate for each allowance claimed. Note – the allowance value is adjusted for inflation each year, so it will be $3900 in 2013.
I’ll end by saying the power is in your hands — do you wish to get your taxes dead-on, as close to zero owed or refunded as you can get, or would you prefer to use the withholding as a forced savings, and use that April windfall for a planned vacation? You might even try to pay the minimum you can to avoid a penalty but treat the amount you owe as an interest free loan from Uncle Sam.
How will you use your W-4 powers?Source: blogs.hrblock.com