Tax Withholding Estimator
It’s nearing August the time to make any adjustments to your tax withholding is coming closer to an end. There’s only a few more months to increase or decrease how much you withhold from your paycheck. This can be confusing, estimating how much you’ll owe at the end of the year and if you have it correctly calculated . We all would like to avoid having a massive tax bill at the end of the year. The IRS has a tool to help adjust your tax withholding through the new IRS tax withholding calculator.
Tax Withholding Strategies
The IRS wants to help you figure out your taxes and how much to withhold. Luckily they’ve updated their withholding calculator. You can find the IRS Calculator here. Finally, you can go back instead of starting over as well.
There are two modes of thought when it comes to setting up your taxes through the year. You can set your filing status and let it be or adjust it to aim towards a $0 refund. If you are dual income I’d recommend setting your withholding to the married but withhold at the single rate. This is a conservative approach but in most cases will stop you from owing taxes at the end of the year. The married selection assumes that there is only one income being brought into the household.
The second tax approach is to minimize your taxes withheld during the year and takes the opposite approach of the first. This would allow you to get as close to a $0 refund at the end of the year. Some people will see this as avoiding giving the government an “interest-free loan” on your money. While very true it does hold risk if not done correctly. If you mis-calculate you can accidentally end up owing hundreds at the end of the year. Alternatively, if done correctly, you will keep up your pay throughout the year. Luckily, the IRS calculator exists, and it’s been updated. The updates include making it easier to use, a simpler interface, and clearer information on possible deductions and credits.
Stepping Through the Tax Estimator
Here’s the first page of the estimator.
You can see it’s quite straight-forward. Select your filing status, if you have dependents, and number of dependents.
Following the dependents are questions regarding income amounts, number of jobs, and if you will receive income from any other sources. This is followed by income and withholding questions based on your pay, pay frequency, and withholding amount.
Fill out your income then fill out and input any adjustments you may have. This can include things like interest deductions, HSA deductions, and similar adjustments.
Tax Credits.
After you complete the tax credits and deductions you’ll find your results on the final page. On this page it will show you whether you have money coming back or owed more. Below your results you will also see how to adjust your results. You can see how to maximize your return (considered greater than $500) or get it as close to $0 as possible by adjusting your withholdings. This will step you through how to setup and adjust your tax withholding.
Finally it shows a snapshot of the information you have entered.
Adjusting Your Tax Withholding
After you’ve adjusted your tax withholding your next pay period should see a pay-bump or decrease. If you are being more aggressive with your taxes, this is a great time to adjust your retirement contributions, TSP contributions, or work on that emergency fund. These are all simple ways to passively save more money without major changes to your take-home pay. If your unsure where to contribute to your TSP check out this post, or if you’d like to work on that emergency fund head over here.
Overall, I’m a huge fan of the new estimator. It’s very clean and much easier to use. Not having to start over is a big plus and I like to take a look at this quarterly or semi-annually. Personally, I’ll stick with a slightly larger refund and be less aggressive tax wise. I find that getting a larger check at the beginning of the year I’m more likely to set money aside for brokerage or retirement accounts than piecing an extra $50-100 a month. Does it make perfect sense? Not at all, but it’s what works for me. What works for you?
Thanks for reading!