I used to be excited to get a tax refund. It was always, “wow, what am I going to do with all this money?” When I was in law school and had my daughter I was the recipient of the Earned Income Tax Credit (EITC). The EITC is a refundable tax credit for low to moderate income working individuals and couples, particularly those with children. Outside of my student loans, my income was working in the summer as a summer intern/law clerk.
In that situation, I would have not been able to ascertain how much to have withheld from my pay in order for me to not pay any taxes. One year I received $3,000. Rather than pay off my credit card debt or put the money towards my car note I spent on things I was unable to spend money on. I purchased clothes for me and my daughter and I used part of the money to open up a checking account and college fund for her. $3,000 is A LOT of money which is why I was not happy with my $2,300 tax refund this year.
Now I am feeling uneasy because, according to the tax reform, I should pay less taxes and I can’t figure out what my tax liability will be even with all the calculators. Also, the media is still saying to be careful so you don’t owe at tax time next year. I don’t mind owing. I just don’t want to owe a lot and then not be prepared to pay it.
I feel like this entire tax reform has taken me for a loop. I have been looking at my check stubs and am trying to figure out how to adjust my withholdings so I don’t have to pay too much in taxes. I used to be the person who was happy when I got a tax refund but that almost $200 per month that I had over withheld could have done a lot for me.
First, I could have increased my savings into my emergency fund with that extra money. My emergency fund is not as full as it needs to be given I purchased a house. And no, a house is not an emergency but I got a good deal on my home and it costs me less to live in this home than to live in my apartment complex in which the rent was increasing $150 t0 $200 per month annually. Here, I have a fixed mortgage and I am eligible to get a homestead exemption which reduces my property tax.
Second, I could have used that extra $200 per month to pay down my car note. I am already on path to pay my car note off in four years with the extra $87 I pay per month. I am very tired of paying a car note as it is and my plan was to save and put a bigger down deposit on it and then pay it off. But my plan did not work as my last car died on me on the highway and couldn’t be repaired.
Third, that extra $200 could have gone towards my saving for my home. Yes, $2,400 would not have made a large dent in my down deposit but it would have been something. I paid cash for my washer and dryer (which I got for a great deal during Black Friday) and my daughter’s bedroom set (another great Black Friday deal). Believe it or not, that $2,400 would have paid for the majority of those two expenses. I think both totaled $3,000 so I would have only had to have put in an additional $600. But at least I didn’t buy either one of them on credit so that’s a good thing.
Fourth, the $2,400 could have EASILY funded some of my trips in 2017. Again, I paid cash for all of my trips but I gave the government $2,400 of free money. This will not happen again.
I looked at my tax liability for 2017 and while I know there are changes to the tax law that will lower my tax bill, I am assuming my tax liability will be around the same amount. Either way, I have too much money taken out in taxes so I have taken the total of my tax liability and divided it by 26. That number is what I will have taken out of my check. I don’t know how that can magically happen because I do not know at this point how many deductions I will need to take in order get to my 2017 federal tax liability amount but I will just continue to adjust my W-4 until it gets to that magic number.
So, if you paid $12,000 in taxes and only owed $10,000, and you were paid bi-weekly (26 pay periods), you paid $461.54 in federal taxes rather than $384.62 in federal taxes. That’s a difference of $76.92 per pay period. Since you know that you don’t have to pay as much in taxes then adjust your withholdings so you are paying $385 per pay period.
Some people would do well with having too much money withheld. Some people look at it as a way of easily saving money. If it is out of sight (going directly to the government), then it is out of mind until April 15. However, if you look at what your tax liability has been over the years and then adjust your taxes and have that money automatically deposited into a savings account, you would be earning some interest and not giving the government an interest free loan.
And please note that if you owe the federal government they want their money ASAP. If you do not have that money paid by April 15 then you are assessed penalties and those penalties can be pretty hefty. It would be AWESOME if the government paid us what we over paid and then some but they don’t. However, if you are someone who feels like that is the best way to save then there is nothing that I can really say except that, it really isn’t. And if you are someone who is concerned that you may owe the federal government then just take your adjusted tax withholding money and have it deposited into a separate account. I find it highly unlikely that if you use the formula I described above and adjust your withholdings to be around that amount you will owe the feds anything and if you do, it may be a minimal amount. For example, I owe the state government $60. I think I owed the same last year and I am not adjusting my withholdings to get a tax refund. I will gladly give them my $60 for me being able to keep my money for the preceding 12 months.
So, who wants to keep their hard earn money for themselves (MEEEE!!!!). Do your best to keep your money and stop giving the federal government your hard earned money for free.