Feb 282007
 

Gina and those wonderful geeks at LifeHacker featured an article about an online payckeck calculator in one of today’s LH blog entries.

I have long recommended that my clients change their withholding once they purchase a home. The fact is, most homeowners get quite a large tax refund. This check you’re receiving from the U.S. Treasury, no matter the amount, reflects an interest-free loan you made to Uncle Sam! Heck, they don’t even say, “Thanks!” when you get your refund check.

Remember, if you’re getting a refund every year, you need to adjust the withholding. You’re overpaying your taxes with every paycheck.

Especially if you’re a homeowner or file a Schedule C with enough expenses to dramatically reduce your taxable income, you must pay attention to this money you’re tossing out the window.

Not that you shouldn’t get a refund: by all means, a refund is good because you certainly don’t want to OWE the IRS anything. You just don’t want a tremendous amount of money back; I think a $1,000 refund is adequate.

IRS.gov provides more information about withholding issues.

Basically, if you’re getting a refund every year, the IRS says you can reduce your withholding. And I quote, “You should try to have your withholding match your actual tax liability. If too much tax is withheld, you will lose the use of that money until you get your refund.” Also, “You can adjust your withholding by filing a new Form W-4 with your employer at any time.” (See page 2 of the PDF I’ve linked to above: IRS Publication 919)

My favorite quote, “You should check your withholding if there are personal or financial changes in your life…that may affect your tax liability.”

Let’s see, what would be a personal and financial change that would affect your tax liability? Hmm…umm…hmm…Oh RIGHT! Buying a HOME! Mortgage interest and property taxes are tax deductible for most homeowners. I think that constitutes a financial change, no?

I strongly recommend my clients consult with a tax professional before making a withholding change. In the meantime, for the curious at heart, the website referred to in the LifeHacker article is a good way to get a sense for how much money you could keep in your wallet instead of sending it away to the government for a year or more.

 Posted by at 12:03 pm

  2 Responses to “LifeHacker.com: Paycheck calculator and your BIG tax refund”

  1. […] next year. Your tax professional—admiring your obvious financial smarts—will then calculate how to reduce your withholding on your paycheck so that money you’ve been lending the government goes into your pocket each […]

  2. […] he needs to consult with the accountant in the area of getting a lower refund after he buys a home. Instead of waiting for a refund, he should lower the tax deductions from his weekly paycheck thus enabling him to bring home more […]

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