Sunday, June 07, 2015

Day 64: Budget Tip - Get More Out of Your Paycheck

What's your typical reaction when you look at your paycheck? Is it, "JAM! Look at all them bills I'm takin' home!" Perhaps.

But the more likely reaction is, "JAM! Look at all them bills the IRS is takin' out!" Isn't it a crazy thing to look at your gross pay and then your net pay and be like "how the heck does the math work on that?"

After Federal Income Tax, FICA, health insurance, and 401(k) other pre-tax deductions, you can have upward of 40% of your gross pay reduced.

Did you know that you can actually do something about this? By this I don't mean that you get a raise; that would be nice, but you'd probably see that it just means more money gets taken out because the percentage doesn't change.

No, it's something simple, but takes a little bit of effort.

The most significant change you can look into making is the amount of federal income tax you pay out of every paycheck.

Bottom line, the IRS can only use the tax money that you are required to pay. If you underpay, they will make you pay when you file your tax paperwork; if you overpay, you get a refund when you file your tax paperwork. Unless you're self-employed, chances are you got a decent tax return a few months back. You ever ask why that is? Because, as I just mentioned, you overpaid your taxes throughout the year and the IRS is just giving you your money back.

Look familiar?
So, you might ask, how does that happen? When you start working at a new company, you fill out a W-4 to establish what those taxes will be. There's a worksheet that's associated with the form to help you figure out all the hullabaloo and gibberish; it's confusing for Ph.D.s I'm sure. As far as I can tell, it is all to help you figure out how many allowances you can give yourself, which determine the amount of tax that's taken out.

You probably don't think much of it and are thrilled when you get a fat return in the thousands. Again, all this means is the IRS is giving back what was rightfully yours the whole time. 

So why wait to get the money months later? Why not have at your disposal throughout the year, bumping up that paycheck and using it toward immediate needs, which may of course be, Debt Snowballing like nobody's business. Or, you can use it toward your savings, where you can gain a little bit of interest.

Don't let the IRS be your tin can buried in the backyard.

Thankfully, the IRS is also helpful here. They provide a Withholding Calculator on their website that you can work through to figure out just what to do with your W-4. I went through the exercise today with just a pay stub and my last tax return and learned what I needed to do to get roughly $2000 back in my paycheck throughout the year. That's pretty sweet, right?

So,

  1. Use the calculator. Figure out what changes need to be made.
  2. Request a new W-4 and fill it out based on the instructions given by the IRS
  3. Get paid.
Boom!

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