Thanksgiving has just passed and the Christmas season is now upon us. This is the time of year that people tend to slow down and really focus on what they are thankful for. If you ask most 
accountants, the holidays are the last sense of “relaxation” they’ll have for a few months. It’s the calm before the tax-storm, if you will. Although the IRS hasn’t officially announced the first day to file your 2017 taxes, we all know it’s coming. There’s been some speculation about the day after the Martin Luther King, Jr. holiday or January 22 of the following week, but the IRS has been tight-lipped. Those dates are nothing more than a guess. In years past, the IRS has waited until December to make its big announcement—treating it like a highly anticipated Christmas gift to all Americans. What’s the hold-up this year? Well, if you’ve followed the news, social media, tabloids, or any other form of commentary (basically if you haven’t lived under a rock), you’ve heard all about tax reform. It’s possible the IRS is waiting to see what happens in regard to the tax reform legislation before announcing the first day to file. The way it’s looking, tax reform legislation (even if it is passed before year end), isn’t going to have any bearing on 2017 filings. Whatever they are, the IRS has its reasons for waiting to announce. We will all have to anxiously wait to see what the magic date in January will be.
Anyway, back to the subject at hand. Today we are talking about refunds. Many people feel like they’ve had a stroke of luck when they find out they are due a refund after filing their taxes. They feel like the government is bestowing some sort of free gift upon them. Well, that’s the furthest thing from the truth. Uncle Sam doesn’t just cut you a check for being a good American out of the goodness of his heart. He only gives that money to you because it’s YOURS to begin with! Zero is the Holy Grail when we talk about refunds and tax liability. By owing zero dollars in unpaid taxes and getting zero dollars from the government, it’s like you “won” at taxes. Let me explain, it means you correctly anticipated your tax liability and adjusted your withholding to cover that amount…no more, no less.
So why isn’t a lump-sum check from the IRS a good thing? Well first of all, it means that you over-estimated your tax liability and had more withheld from each pay check than you needed. Why is that a bad thing? Well, basically, you gave the US government an interest-free loan. They used your money all year FOR FREE. If they’d have borrowed that money from a bank, they would had to pay back the principle AND interest. But since many Americans over pay their taxes, the government can use their money all year without paying a dime in interest fees. If instead, you more accurately estimated your tax liability and adjusted your withholding accordingly, you could end up with more take home pay in your check each pay period. Then, you could invest that extra money that normally would have gone to the government. By doing so, you’re earning interest so you’re making money!
If you overpaid your taxes through withholding payments for 2017, you’ll end up with a refund. But, it’s not too late to make adjustments so your 2018 taxes can be more on track. How can you do this? I’m glad you asked! First of all, compare your W-2s from the past couple of years. Have they remained pretty constant? Have you had any major life changes-marriage? Birth of a child? Divorce? Purchase of a home? If everything is pretty constant and nothing major has changed this year, making the necessary adjustments is easy. Just compare your previous year’s income tax return and your most recent paystub. Calculate the amount of withholding you would need for the entire year to satisfy 100-110% of your previous year’s tax liability. Then, adjust your withholding allowances accordingly. To adjust your withholding allowances, just ask your HR representative or employer for another W-4 form. Complete the form with the new allowances you wish to claim. It’s that easy!
Now, if you’ve encountered some life changes and wish to update your W-4 form accordingly, it’s still a pretty easy process. First of all, decide what allowances you wish to take. Not sure? Check out the IRS website and use one of their handy withholding calculators. By entering all of the required information, you will have a better idea of which allowances to claim on your W-4 form. Armed with that information, ask you employer or HR representative for a new W-4 form that will reflect your new allowances.
As long as you’ve dotted all of your i’s and crossed all of your t’s, your tax liability should now be closer to zero and you shouldn’t be owed a refund, or owe any additional taxes. Each week, your take-home pay should be a little more than it was before. My advice? If you were able to get by okay without that extra money before, pretend like it doesn’t exist now and invest it! If you’re still concerned you may have a small tax liability come filing day, set aside some extra cash in a savings account just in case. With the extra cash you have in your paychecks, try to max out a Roth or traditional 401K for the year. Trust me…later on, you’ll be glad you did. If you need a little refresher on some retirement savings plans, check two of my previous blogs on Traditional IRAs and Roth IRAs.
As always, taxes and estimating withholdings can leave you confused and with more questions than answers. Wealth Builders CPAs & Consultants can help! Let us take the guess-work and headache out of tax planning. Call our office today and schedule your free consultation. Our tax and financial experts can help you to accurately predict your tax liability and the necessary withholding payments to meet that liability. We can also provide guidance on how to effectively invest the “extra” money in your weekly or bi-weekly paychecks. Let us help you build YOUR wealth! Call us today!
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Bell, Kay. “How and Why to Adjust You Tax Withholding,” Bankrate, 3 Apr. 2017, www.bankrate.com/finance/taxes/adjust-withholding.aspx.
Yochim, Dayana. “That Tax Refund is a Rip-Off.” The Motley Fool, www.fool.com/taxes/that-tax-refund-is-a-rip-off.aspx.