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By Lucas Caserez
Have you filed your taxes already? Did you get a great big refund or was it not what you were hoping for?
Did you know you don’t have to wait until tax season to receive your refund or even wait to find out how much it will be?
The IRS provides a great tool that lets you forecast your taxes due for the year. It will even help you adjust your paycheck to increase your tax refund or reduce it.
Why would you reduce it? Because it means you can start receiving your refund now rather than wait until you file your taxes next year.
This works exceptionally well when you are disciplined with the larger paycheck. You could use the additional cash flow to pay off debt faster rather than wait until next tax season. The difference could be hundreds of dollars in saved interest costs.
Example: If you expect to receive a $2,400 refund, you can adjust your paycheck and it will reduce your tax withholding by $200 a month and increase your paycheck. When you file you will get $0 back but will be able to use your refund throughout the year.
If you know yourself and don’t think that you’ll do well with larger paychecks, then receiving a refund may be the best thing. The calculator can still help with that though. You can estimate what your refund is likely to be and can toggle the number to increase your refund.
Example: If you expect to receive a $2,000 refund, but wanted to increase it to $3,200 to force you to save more. You’d make an adjustment to your paycheck that withholds $100 more a month if you did this at the start of the year.
(The examples used a full year. If you implement changes to your withholding mid-year the adjustments will be larger and would require you to update your tax withholding the following year to smooth out 2021 tax withholding estimates)
Regardless of how you utilize the IRS Tax Withholding Calculator, it will provide you additional insight into what to expect. Your tax withholding and your tax refund no longer have to be a mystery. This will allow you more control in your planning and to “Take Your Financial Confidence to the Next Level!”. This is the goal of all of the articles I write for the North Forty, as well as, my blog for Level Up Financial Planning.
Lucas Casarez is a husband, father of two amazing kids, and a Certified Financial Planner™. He founded Level Up Financial Planning, which is one of the few fee-only financial planners in Northern Colorado. The mission of Level Up Financial Planning is to guide his clients in taking their financial confidence to the next level.
Have a personal finance question you would like me to answer in a future week? E-mail email@example.com