Getting Smart About Tax Withholdings

 Fiscal Therapy: Getting Smart About Tax Withholdings

This article originally appeared in our monthly newsletter, Fiscal Therapy.
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WHAT I'M THINKING ABOUT: Your tax withholdings

The new tax law means you likely saw a bump in your take-home pay starting in January. However, this doesn’t necessarily mean your 2018 taxes will go down — deductions and exemptions have changed as well, so you may well end up with a higher taxes and a surprise tax bill this time next year. Now is a good time to review your tax withholdings and to ensure your budget leaves sufficient cash cushion to cover any tax payments next year if there's any uncertainty.

Certain people should take extra care to double-check withholdings for the current year: two-income couples, those with large itemized deductions, and filers claiming allowances on their W-4 for family members over age 17. For high-income married couples, it might make sense for one or both to check the box on the W-4 "married, withholding at higher Single rate" with zero allowances. Remember, the more allowances you claim on your W-4, the less taxes withheld. For larger tax withholdings, take your allowances down to zero. Here is the withholding calculator provided by the IRS. Also, the NY Times posted a helpful article this week with more details on this topic.

For those who received a tax refund this year, be smart about how you use it. Here are the three best ways to use a refund:

  1. Pay off credit card debt.
  2. Boost your emergency savings — you should have at least 3 months of essential expenses and debt payments in the bank at all times.
  3. Pay off other debts that have high or variable interest rates.

Bonus Tip. Do not spend your refund before it hits the bank. This is especially true for 2018 when there is uncertainty about how the new tax bill will impact your taxes. Just because you always get a refund doesn’t mean you will the following year.


WHAT I'M READING

Here are two interesting articles I read this month: 

 

Dept. Of Education Fail: Teachers Lose Grants, Forced To Repay Thousands In Loans
NPR, Morning Edition

If you’re relying on loan forgiveness or a grant from the federal government based on your public service work, don’t miss this article. Knowing the details of these programs is essential, as one misstep could disqualify you.

 

How to retire by 40: 3 proven tips from someone who has
By Anna Bahney, CNN Money

Anyone pining for early retirement? Here’s an insightful story about someone who made it happen at 37. This reinforces many of the healthy habits I’ve covered previously, such as living below your means and resisting lifestyle creep. Be clear about why you’re striving for early retirement. Also, the book Your Money or Your Life by Joe Dominguez and Vicki Robin which this article mentions is not to be missed if you’re serious about retiring early. It’s dense but worth your time.