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I've heard many financial people say that it's better to pay less in taxes all year (and use that money in the way you decide) than to pay higher income taxes all year and then get a "windfall" every year in a tax return. I just heard Dave Ramsey mention this idea again a few minutes ago on the radio. He told the caller "If you're getting $6,000 back in a tax return, you need to adjust your withholding."
But I routinely get between $5000-$6000 back each year (mostly from federal, and a little from the state), and I believe my withholding is "adjusted" as low as it can go (single with zero exemptions).
I don't mind getting this little windfall every February, but I see it would be better if I could just pay less all year and maybe invest that money or at least get a little interest on it. But the way I see it, there's no way I can do that. Am I missing something? I do have a CPA do my tax returns every year, and I'll certainly ask him. But I'm kind of certain he would have advised me on this already if there was something that should change.
I'm sure my payroll dept isn't just going to agree to withhold less from each of my checks because I tell them how much I give to charities, or how much interest I pay on my mortgage! I know some people might claim X number of dependents all year, and then get money back at the end of the year because they don't have that many dependents. But I can't see the logic in that, unless I considered myself untrustworthy with my own money and need the government to hold it for me. So those people, I agree, should adjust their withholding downward. But me?
So is Dave wrong on this? Are all those other people who say this wrong too?
He told the caller "If you're getting $6,000 back in a tax return, you need to adjust your withholding."
But I routinely get between $5000-$6000 back each year (mostly from federal, and a little from the state), and I believe my withholding is "adjusted" as low as it can go (single with zero exemptions).
Nope Dave isn't wrong on this. Why give the government an interest free loan? Better for you to get less taken out each year and you can save/invest it.
You have it backwards. Instead of putting 0 exemptions....increase your exemptions #. The more exemptions you put, the less taxes they take out. Even if you don't have kids, you can list a higher exemptions # and they will take out less each paycheck.
Ask your payroll department to help you calculate what the correct # will be for you to get enough taken out where you won't get a big refund but not too many where you need to pay in.
Ah, I see. I was thinking backward. I was thinking the people who claimed made-up kids were trying to get a big return.
But then how would my charitable contributions fit in? I like to give a decent amount to charities every year, so I'll still expect to get a return on those, right?
This gets into the psychology of getting a big refund check (a nice feeling) and not noticing that your paycheck is lower than it could be.
> I'm sure my payroll dept isn't just going to agree to withhold less from each of my checks because I tell them how much I give to charities, or how much interest I pay on my mortgage!
Why not? It's entirely your choice unless you are at the extremes (claiming like 20 withholdings) which you probably are not.
Technically, exemptions are claimed on your 1040 when you file taxes at the end of the year, and are based on # of people.
Allowances are claimed on your W-4 as a tax-withholding estimation tool. Increase your allowances and you'll get a smaller refund since they'll withhold less tax from you (which you can spend/invest during the year).
I don't think you need to be telling HR all this personal info just to get them to take less out. Explain to them that you are getting large returns and want to make whatever adjustments are needed to get closer to breaking even come tax time.
So if I am single and have no dependents, it's not illegal or unethical to "lie" and say I have dependents? I'm very squeamish about anything that feels like dishonesty.
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