Tax Tylenol…to Ease Your Financial Headache

I’m hearing it virtually everyday now from friends, clients, and family members.

“I wish I had more money.”

“How did we end up with so many bills?”

“If I can just make it to next payday…”

I understand that most of us can’t just wave a wand and create more income for ourselves, or talk our companies into giving us a raise…not in this economy. But, what if I told you that you can…at least create additional income for yourselves…maybe not talk your boss into a raise, just yet.

Did you know that you can, in essence, give yourself a raise today? One that will, most of the time, immediately hit your very next paycheck?  Here are the facts.

You probably received a huge tax refund this year. Maybe more than $2,000? If that’s the case, did you know that you just gave our government an interest-free loan in the amount of $2,000? It’s true.

In essence, you said

“Dear Uncle Sam,

I don’t need my money, will you hold on to this for the next 12 months, until I file my tax return?”

Sounds insane right? You’re doing this every year! See, when you receive a tax REFUND – it means that you OVERPAID your taxes for the year, which also means our government will give you back the difference, in the form of a refund. But, can you really afford to wait 12 months? Your family could use the money now, not next year.

Think of it this way…

If you buy a book from Amazon for $10…does it make sense to give them $50 for that book, expecting to have the $40 difference refunded to you in 12 months?

Would you buy a new TV from Best Buy for $1,000, but give them $3,000 expecting a refund of the $2,000 difference a year from now? Of course not! Then, why would you do the very same thing with your taxes? This is YOUR hard-earned money that we’re talking about…no one else…YOUR money.

Here’s your solution. Look at your paystub. On there, it will say what your “tax withholding” rate is. It will have a number similar to one of these: S1 (Single & 1), M2 (Married & 2), S0 (Single & zero). The S = Single Filing, and M = Married Filing. The associated numbers represent the amount of dependents that are likely in your household.

1. First-things-first, determine if anything is going to change significantly for you this year. Are you expecting a baby, a sizable raise in your pay rate, heading back to college for a degree, or maybe selling or buying a home? All of these things can impact your tax rate and we will want to take those into account before adjusting. If you do have some things changing, feel free to email me, or see your tax professional as we will likely need to adjust your model.

2. If not a lot will be changing this year and given the $2,000 refund example above, you can elect to receive your refund in equal monthly installments just by changing your withholding rate. A general rule is this:

The more withholdings you claim, the less amount of taxes will be deducted from your paycheck.

The less withholdings you claim, more taxes will be taken from your pay.

Example: Someone claiming Single & Zero (S0) will have MORE money taken from their pay than someone claiming Single & Two (S2). Why? Because the theory is that someone with more withholdings will likely qualify for more tax credits and overall deductions, requiring less taxes to be due. This works exactly opposite for someone with claiming a lesser amount of withholdings.

You can adjust your withholding rate so that you receive that $2,000 refund (from above) in equal monthly installments throughout the year, instead of one lump sum at the end of the year. That’s an “extra” $166.67/month. No, you won’t receive the large tax refund, but you WILL be reaping the benefits each month. Even if you just placed the extra $166 into your savings each month, there’s a little more comfort knowing that your dollars are available now, instead of later. For a person making $36k per year, that $166/month = the equivalent of a 6% pay raise. Ask your boss to give you a 6% raise today, do you think it will happen?

Don’t let the above information overwhelm you. It really is simple, once you start looking at the numbers. Get your current paystub out. Go to Brown, Edwards & Company’s calculator and start playing around with your scenarios. If you need help, I’m here.

Remember, would you pay $50 for the book on Amazon knowing that it only cost $10…and wait 12 months for the refund?

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2 Responses to “Tax Tylenol…to Ease Your Financial Headache”

1. Leslie Coty says:

   February 16, 2010 at 12:01 am

   I have to laugh when people get all excited that they’re getting a $5000 “refund.” They OVERPAID their taxes by $5000! Why let the government keep your money and not pay you any interest? (You notice it does not work that way in reverse – gov’t charges interest AND penalty.) What’s worse is when you say, “OK you’re getting a $5000 refund. How much did you pay in taxes?” 9 times out of 10 people don’t know. Would love to get a bill once a year for our taxes instead of payroll withholding. We’d see a tax revolt unlike anything we’ve ever seen!

   Since we’re stuck with the current tax scheme, best thing is to try to balance out at as close to $0 as possible at the end of the year – you don’t owe them and they don’t owe you.

   Thanks for the blog. I hope lots of people read it. And act on it.
2. Cathie Gray says:

   February 17, 2010 at 9:32 am

   Josh, nice work!