Post on 29-Jan-2018
Let’s face it, we can all use more in our
weekly/bi-weekly/semi-monthly paychecks.
Yes, it would be difficult to walk into the
boss’ office today and judiciously argue your
merits for a raise with the economy in the
state of disarray it is (regardless of short-
term optimism). There are, however, ways in
which you can increase your net
income today–or just as soon as your HR
Department can process the changes. They
are quite easy, but do require that you give
up your large tax refund which may turn
some people off. What’s more, is that by
getting more of your income in your
paychecks, you can accomplish your
financial goals faster. That last line may be
just the motivation some people need to
adjust the way they view their big tax refund
preference
You know that little piece of paper that you filled out when you
first started your job? The worksheet that you probably had no
idea what to do with but knew that it had to be filled out? It’s
called a W-4 and its purpose is to tell the employer’s HR
Department just how much money in Federal withholding they
should take from your gross salary each payday. Most people
choose 0 allowances so that they can receive a hefty refund when
they file their annual 1040 individual tax return, which is a huge
mistake. Some see it as “forced savings”, which to a degree is
understandable if you have no self control with regard to
spending, except for one small fact: THERE IS NO INTEREST
EARNED ON THOSE “SAVINGS”. It may be nice to see a big direct
deposit in your bank account after filing your 1040 to pay off
holiday spending, or fund your IRA, or even fund your summer
vacation but with more and more people struggling to live on
current salaries, fund retirement accounts, pay down debt, etc.
why would you want to forfeit the ability to have that extra money
in a savings account since anything is better than earning 0%
interest? Even if you aren’t struggling, it still makes more sense to
get your money sooner rather than later.
Another often overlooked method of reducing tax withholding is
your employer’s Sec-125 Cafeteria Plan or Flexible Spending
Account (FSA). These vehicles are ways to pay for general health-
and child-care expenses such as daycare, medical insurance
premiums, and most out-of-pocket medical expenses. Under such
plans, contributions are exempt from Federal, Social Security, and
Medicare taxes (essentially excluded from wages in the
calculation of taxes). This way, you are still paying the same
amount of money for medical and child-care expenses, however
the earnings are not being taxed, thereby leaving more money in
your net pay each period. Not all employers have established
plans, so you will probably need to ask your HR Department about
it or request that the issue be researched.
By taking advantage of such not-so-secret methods of reducing
your tax withholding and planning for expenses, you effectively
increase your net pay, and give yourself a little extra income to
hopefully get your goals accomplished in a shorter amount of time.
The thing that I can’t understand is that so many
people claim to be frugal, or so money-wise that
they have adjusted their habits to take
advantage of every dime they have, yet some of
these same people give up the use of this money
simply because they want that larger inflow at
tax time. And, if someone claims to be good with
managing their money, isn’t it a little
nonsensical to use the excuse of “forced
savings”? Maybe someone can explain this to
me….