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.