January is Here: Time to Adjust Your W-4

All week, I ran 2011-themed posts to ring in the new year. I hope you enjoyed them!

It’s early January, which means the best time of the year to start planning for this year’s tax burden. I typically wait until January 15th so I have my first pay stub in hand when I run the numbers.

For those unfamiliar with U.S. tax laws, it’s set up as a pay-as-you-go tax system, collecting federal and state taxes from your paycheck throughout the year, and then verifying the correct total at the end of the year.

If you over-paid your taxes, you’re owed a refund and get “free money” in the mail (named thusly by me because that’s how most people treat it). If you under-paid, you’re asked to make up the difference, sometimes with penalties if the shortfall is severe. Neither are terribly good extremes to be in, if you ask me.

For tax planning purposes, my goal is always to get as close to level-zero as possible, neither owing or being owed money at the end of the year. This ensures two very important things:

  1. I don’t have to write a check in April for money I haven’t planned to pay.
  2. I’m not letting the government borrow interest-free from me for an entire year.

Your goals might be different, so adjust your strategy and expectations accordingly.

IRS Tax Calculator

The best tool I’ve found for this purpose is the IRS tax calculator, which will let you enter your information and calculate your options. The calculator asks you simple questions, such as:

  • Your expected tax status (single, married, etc.)
  • How many jobs you have
  • How many kids or other dependents you have
  • Total planned income
  • Expected adjustments to income
  • Taxes you had withheld on your last paycheck

Here’s what that looks like:

The IRS computers then run their secret analysis, and viola! The program then spits out a screen that looks like this:

You can use this information to make a very educated decision about how to fill out your W-4. Next time your friendly HR representative says “most people just put 0,” you can tell her most people are following blind advice.

Take control of your taxes this year–fill out your W-4 with confidence using this quick and easy tool. Unfortunately, the tool still reflects 2010 tax laws as of this writing, so we may have to wait a few weeks for the IRS to update the calculator.

Photo by alancleaver_2000

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