Every year about this time, people who might otherwise be prone to procrastination rush to do their taxes. They want to get their refund as fast as they can.
But getting a refund is often a signal that you are having too much money taken out of your paycheck. That’s not a good thing. Your goal should be to owe a very tiny amount of tax or get a small refund.
And how to you do that?
Adjust your Form W-4 – Employee’s Withholding Allowance Certificate.
For example, let’s look at the first of three questions I’m going to answer from my recent online chat at www.washingtonpost.com.
In reference to the W-4, a Maryland reader asked: “I am married with an investment property. I will be filing married jointly. My salary is $75,000. I was wondering how many exemptions would put me in a better overall financial situation. This is because I heard that if you add more exemptions, with the interest I pay on my investment home and primary home, I will not be taxed heavily throughout the year.”
As a wage earner, you are required to pay federal income tax by having it withheld from your pay throughout the year. This is your “withholding,” which is based on the number of allowances you claim on your W-4.
If your tax situation changes – you get married, have a child, buy a home – you should fill out a new form because accounting for each those situations could result in more money in your paycheck. You should try to have your withholding match your actual tax liability.
So the Maryland reader is on the right track. He knows he has to adjust his tax withholding. But only he knows the information to determine how many allowances to take, which is based on the itemized tax deductions (mortgage and investment interest, charitable gifts, deductible medical expenses, etc.) or credits he expects to claim on his return. If you too realize you need to update your W-4, please note that the number of allowances you take may be different than the number of exemptions you claim on your tax return.
You can adjust your withholding by using a worksheet on the W-4. But surely you wouldn’t be surprised if I said it is a little daunting.
Instead, I would recommend you use the IRS online withholding calculator at www.irs.gov. In the search box, type “withholding calculator.” You will need your most recent pay stub, a copy of last year’s tax return and any information about deductions or credits you expect to take. Once you’ve answered a series of questions – much easier to understand than the paper worksheet – the calculator will suggest a recommended number of allowances you should put down on your W-4.
If you still need help figuring out if you’re having too much (or too little) withheld, get IRS Publication 919, “How Do I Adjust My Tax Withholding?” You can also download the W-4 form in Spanish. Go to www.irs.gov and click on the link for “Espanol.” Then look for “Formas o Formularios.”
Now on to a question about the safety of Internet-only banks.
“What’s your opinion on ‘online only’ savings accounts?” a reader asked during the chat. “Right now I’m earning diddly squat on my money market at my credit union. What about ING? They don’t have any brick-and-mortar branches to visit. Is it a safe place to park my money for a while?”
Internet-only banks are governed by the same regulations as traditional banks, thrifts and credit unions. However, before placing your money in an Internet bank, please take some precautions. First and foremost, check to make sure it’s insured by the Federal Deposit Insurance Corp.
You can search to see whether the institution is federally insured by going to www.fdic.gov. On the home page type “Is My Bank Insured?” in the search field. The listing of insured institutions is updated every Monday.
If you’re having trouble finding the correct name of the Internet bank or using the online database, contact the FDIC toll free at 877-275-3342.
By the way, ING Bank is insured by the FDIC.
Finally, here’s a question I’m sure many people face.
“My question has to do with relatives and money. My husband and I are very well off and will soon be even more so (I’m graduating from law school this year). My husband’s brother, on the other hand, barely keeps his head above water. We paid his legal bills (about $4,000) a year ago when some old indiscretions caught up with him. We want to help him and his family, but I certainly don’t want them to become dependent on us. Any suggestions?”
Here’s my standard advice for well-off families: To whom much is given, much is required.
However, playing the family banker too often can hurt the person you’re trying to help. There are times you should not financially rescue someone because it may only support his or her bad money-management habits.
By refusing to bail your brother-in-law out, you may actually force him to handle his finances better.
Washington Post Writers Group
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