Adjust your 2010 Tax Withholding and Stop Loaning the Government Money

2010 Federal Tax Withholding Calculator

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in Taxes

If you are like FiscalGeek of 2008 you’re probably looking forward to a large Federal Tax Rebate check in 2010. But think a minute about what that means. That isn’t stimulus money. That’s not the government rewarding you for killing it in 2009. That’s a refund of YOUR money. You have effectively loaned the Internal Revenue Service your considerable dollars tax free! How many times have you been offered a tax free loan not attached to a brand new car you can’t afford? I thought so. Get a little mad about that. Then do something about it. The IRS has on their site an update to their Federal Income Tax Withholding Calculator for 2010 so you can go out and figure out what you should claim on your W-4 forms to reduce the amount of taxes being pulled from your paycheck.

Gathering Information for the Tax Withholding Calculator

The IRS withholding tool needs some information to give you the most accurate results insuring that you don’t underpay or overpay on your taxes. The calculator is only going to give you accurate results based on accurate input so don’t fudge the numbers. Gather your most recent paystub(s) as well as your 2008 Tax Return Information. This is good information to get you going. If you really want to get the most accurate information you can go ahead and work up your actual 2009 Tax Return either manually or use something like the TurboTax Free Edition or whatever version would be appropriate. I know it’s a bit early to file since you probably haven’t actually received any W-2′s but you can use your end of year paystub as a good estimate. That’s going to give you a better idea of your inputs for 2010. But you can just do your best to estimate if you don’t want to go to the trouble of pre-working your 2009 taxes. That’s up to you.

Actually using the 2010 Tax Withholding Calculator

It’s relatively straightforward to use the IRS tool, its essentially an interview process.

  • Page One: You’ll be asked about your filing status, married, single, and whether or not someone could claim you as a dependent
  • Page Two: More general information focused on the number of jobs you have as well as the number of dependents you can claim
  • Page Three: This is all about your income. First you’ll enter all of your income including wages, tips and salary you expect to receive in 2010. Then you’ll enter how much you contributed to a tax deferred retirement plan like a 401k or Thrift Savings Plan. This would also include any contributions you make to a Flexible Spending Account or Health Savings Account. It continues on to ask you about any other forms for taxable income including unemployment, bonuses or dividend and interest money.
  • Page Four: Deductions. Here’s where you’ll estimate your eligible Medical and Dental expenses outside of your FSA or HSA. What you think you’ll pay in taxes. Interest you paid. Charitable contributions, losses, job expenses and any other deductions.

What the 2010 Withholding Calculator will Deliver

Once you’ve got your data in place the calculator will give you a recommendation on the amount of allowances to enter on your form W-4. There will probably be two recommendations, one that will have you pay slightly more in taxes to avoid having to pay additional tax as well as a more aggressive number of allowances that will have you underpaying your taxes which you’ll have to make up in your 2010 return. Either way you go this will minimize the amount of taxes that will be pulled from your regular paycheck. NOTE: This tool doesn’t change any of your tax data. I assume you know this is just a calculation for what to enter on a revised W-4 form with your employer. To put this in action you’ll need to work with your Human Resource department to get your information updated. This may take a few paychecks to show up depending on your employer.

What to do with your Extra Income

Might I recommend that you direct any additional income from your reduced tax payments towards financial independence. If you are currently have any form of personal debt (credit cards, auto loans, lines of credit) I would recommend directing those extra payments at your debt snowball. From there you could round out your emergency fund or kick up your retirement savings. Anything but letting that money fall back into the mosh pit that is monthly spending. I’m terribly guilty of that in fact years past we had used that extra cash flow to take on a new car payment. Let me be a lesson to you. Alright get to it, and get that money working for you.

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{ 20 comments… read them below or add one }

Jason Unger 2010/01/05 at 2:12 pm

As soon as I get all of my tax documents, this’ll be one of the first things I’m doing.

The past few years have been pretty inconsistent for me – a couple jobs, freelance income, wife working, now at home with new baby, bought house, etc. So I’m hoping that the calculator makes it easier to figure out what I should be withholding.

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paul 2010/01/05 at 2:25 pm

It’s pretty straightforward Jason, there is some assumption that you know what are really deductions, etc. But if you choose the big items like mortgage interest, charitable donations, dependents you should be good to go.

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FFB 2010/01/06 at 3:36 am

So many people depend on that tax return as a big lump sum but they don’t realize they could have had the money in their paychecks already!
.-= FFB´s last blog ..New Year’s Resolutions Are Bulls@%t! =-.

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SailboatFamily 2010/01/06 at 4:20 am

This is most excellent advice. When we first figured this out, we were still somewhat nervous so we agreed that all the “extra” money (which, as you noted, is really our money in the first place), would be put into an interest bearing account. Then, when tax time came around, if our understanding wasn’t right about how much we could be keeping, we’d have the money plus some interest to pay our taxes. After 2 rounds of doing this, we trusted our understanding and now we use the money as we see fit each paycheck. The past several years we’ve had more money in our hands that we had been loaning the government interest free!
.-= SailboatFamily´s last blog ..Composting Marine Toilet Conversion – Step 1 =-.

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Dan 2010/01/08 at 2:37 pm

To be honest, this is one that I’ve struggled with for several years. I will disclose upfront that my family receives a substantial refund every year, so judge my opinion accordingly. Most personal finance columnists give similar advice to what you’ve given here and I tend to agree in principle. I think that perhaps this is good advice for those who have their financial ducks in a row and would be able to include the “extra” income into a budget and have the discipline to stick to that and hopefully be able to save that money, pay off some debt, or put it toward some larger goal. However, I suspect that the majority of American consumers do not have that discipline and would tend to spend that money and not save it or put it toward some larger goal. I tend to view a too large withholding as a sort of forced savings that perhaps many consumers would not have the discpline to stick to otherwise. Now the trick is to not frivolously spend the refund when it arrives, which is another discussion. For me, personally, I purposefully understate my withholdings because I do not trust myself not to spend the money if it were to come a little bit every paycheck. I then look forward to a substantial check toward the beginning of every year and put it to good use and don’t miss the handful of interest dollars I am giving away. For some reason I am more responsible with large chunks of money than dribs and drabs. I guess what I’m suggesting is that ultimately it should be a careful decision that each individual/family needs to think about and it sure helps to have an honest understanding of your own financial discipline, what kind of consumer you are, etc.

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paul 2010/01/08 at 2:55 pm

Dan you make an excellent point. This could be me a couple of years ago for sure although with that large chunk of money I’m afraid we still didn’t make the best choices. Perhaps something like Smarty Pig where it actively pulls money out every month as an option, but saving is saving in the end and I’m certainly not one to advocate against what is working for you.

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Paul @ tax calculator 2010/01/10 at 7:09 pm

I have always found it odd how the government acts as a volatile savings bank (with little or no interest?), only to lose all of our money if something went pear shaped.

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Funny about Money 2010/01/13 at 12:19 am

FOUR PAGES of gobbledygook to have to plow through? Mind-boggling. The chance that I would make a mistake trying to comprehend that stuff hovers right around 100 percent.

My question is, if you do make a mistake and withhold too little, where is the money to pay the back taxes going come from? If you’ve already spent it, you’ll have to go out and borrow to pay your taxes. So, you self-escrow to build savings to pay it, earning all of almost 1 percent in the money market…one way or another, whether it goes into your savings account or into the government’s coffers, you still can’t use it.

No, thank you. Much as it galls me to fork over a free loan to the government, I’d rather withhold too much and get it back than end up having to hand over savings or borrow money to pay my taxes.
.-= Funny about Money´s last blog ..Trying to escape from flypaper =-.

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paul 2010/01/13 at 10:11 am

I would be the last to advocate borrowing money to pay those taxes but the bottom line is it’s all your money in the end and by reducing your actual taxes paid it’s letting you manage that money yourself. Be slightly conservative in using the calculator, don’t claim all your deductions and at the very least you will get less back every year. Further if you are currently in debt and you throw that extra money back right at your debt think of it as combatting the guaranteed negative return of your credit card of 19% or whatever your rate may be at.

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Jen 2010/01/20 at 4:06 pm

I am curious about the section for 401k and FSA contributions. Should I enter ALL of my pre-tax amount here or JUST the 401k and FSA contributions? I ask because my health benefits and Aflac amounts come out of my check pre-tax also. Sorry if this is a stupid question but I was hoping someone could tell me for certain before I enter possibly wrong data here. I didn’t see any other spaces in the IRS form to enter pre-tax info. Thanks!

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paul 2010/01/20 at 4:56 pm

I would only include your 401k and FSA myself and be somewhat conservative.

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Jose 2010/01/27 at 7:27 pm

I’m a little confused on page 4 (Deductions). Under “Taxes you paid”, am I supposed to also include the FEDERAL taxes that I’m estimating to pay this year?

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paul 2010/01/27 at 10:51 pm

Jose I’m not a tax expert but I take that to mean any NON FEDERAL TAXES that you would normally deduct. Typically like property taxes and state taxes.

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TechNUB 2010/02/19 at 2:25 pm

Hello All, I have become a fan of fiscal geek’s blog and followers. Checking out the top 10 posts landed me here. Could any one offer advise on using witholding allowance software for people, like me who have no siblings and are a homeowning/caregiving/POA for an 89+,live-in parent? I love my mom so this means I am managing her daily living requirements, two income streams, expenses and investment portfolios. I bought QUICKEN 10 to help me manage it all and remain confused on how to use it. (At least the FG readers make me feel less alone and able to troubleshoot a little better.) I am seriously considering buying YNAB at this point for its reported simplicity.

We took a beating from the IRS in 08 and I am not sure if I’ve been able to do sufficient damage control for 09. Surfing the “Caregivers”, Elder Affairs, networks has not yielded much advice on savvy financial management, budgeting, estate planning, long term care planning etc, so is there anyone out there to share experience, war stories, etc? Thanks

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paul 2010/02/20 at 10:02 am

TechNUB, you might be money ahead to talk to a tax professional. Your situation warrants some tax expertise you won’t find from me I’m afraid. Perhaps some of the readers might be able to help but for probably under $200 you could get some good advice from a local tax professional. You might try Dave Ramsey’s Endorsed Local Providers for Tax Professionals and there should be someone in your area that has completed his certification process. It’s not as good as the recommendation of someone local you know, but at least something to start with. Best of wishes to you, and be sure to let us know if you find out anything to help you on your way. Thanks for being fan, love to have you here!

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AB 2010/04/13 at 12:46 pm

Thanks for breaking it down for us! I just read this blog http://blog.greensherpa.com/index.php/personal-finance/exemption-redemption/ and it made me realize that I should make sure that I’m following the right plan. Thanks for the help!

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Dave 2010/04/15 at 7:04 am

On Page 3 (income and withholdings) does the “total federal income tax withheld” include the medicare and social security deductions that come out of my pay?

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paul 2010/04/15 at 8:41 am

Dave no it does not, just the federal tax.

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Beck 2011/01/24 at 9:22 am

I have tried using the with holding calculator and have been burned for years by it. I enter all of my current info from my paystubs and what I can deduct, i.e. mortgage interest and student loan interest, and I am told I should get all of my fed tax money back. When I go to do taxes I get nothing back! How can it be over $5000 off? If I have changed my with holding like it suggested I would have been screwed.

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Paul 2011/02/05 at 11:47 am

I am single with a home so I will file itemized deductions at the end of the year. My question is: Can I opt to not have federal withholding taken out of my check during the year but instead put it in a savings account with interest and then at the end of the year when I file my taxes pay what I owe then? If so where would be the best place to save my calculated withholding so it would draw the best interest possible?

Thanks

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