You have a dream, a goal, correct? Perhaps you want to buy a motorcycle, taking a once in a lifetime vacation? There are ways to make this happen with an appropriate budget. A part of the method is to save on your recurring expenses. Another option is to revisit your W-2 form and make it highly favorable to you at tax time.
This is particularly helpful for anyone who has a business or works as a self-employed freelancer, and has a part-time job. Your W-2 form can ensure that you do not owe taxes at the end of the year, and instead get a refund. It is like a checks and balances system. You check that you want taxes withheld and at the end of the year, you get money back. For a lot of people, it is irritating to give the government more money than necessary, but there is one reason to do so. You have it taken out, so you are not tempted to spend that money.
The government is going to withhold a certain amount of taxes each paycheck. The amount is based on how you fill out the form. If you claim 0, then you get more taxes taken out than if you claim 1, claim children, or other deductions that you can claim. Unfortunately, you can only claim 0 if you are single or if you are not the parent claiming children. If you have children, then you have to claim them; especially, if you file a joint tax return.
The IRS website is a beautiful tool. It will tell you what you may owe in taxes based on your income and deductions. The more deductions you have, the less you will need to pay in taxes. Using the website can help you budget for tax season and ensure you have enough taken out of your check.
For example, if you are self-employed, you can determine how much to send in estimated tax payments to cover your taxes. If you have two jobs, where one is a part-time position that uses a W-2, you can have more funds taken out to cover your self-employment tax.
Beyond claiming 0 or any dependents, there is a little box in the second half of the W-2 form that asks if there is an amount you want withheld from your check, as additional taxes. You can have any amount withheld.
A reason to consider this is to save up for your holiday. If you expect a refund check, then you can plan a holiday with that money. You won’t earn interest on it, like in a savings account, but you also have it taken out before you even remember the money exists.
It is also a way to cover you, if your deductions are not the same from year to year. You might have a deduction for a mortgage this year, but next year you sold the home, gained equity, which is considered income, and now you owe more in taxes than usual.
Sometimes planning for taxes can save you in the end. You don’t end up having to come up with a large payment or worse setting up a payment agreement, where you have to pay a certain amount each month.
Another helpful concept with assessing your W-2 is gaining peace of mind. Those who don’t have to worry about possibly paying taxes will be able to sleep better throughout the year, as well as during tax season.
Tasks for this Chapter
- Assess your projected tax payment based on deductions and income.
- Determine if you have the funds to have more taxes withheld than are currently taken out of your check.
- You do have to assess where you can save in other areas and then see if you can have more withheld. If it will be too tight because you need every last penny, without having anywhere you can cut expenses, then don’t change your withholding amounts.