Whether or not we like the current administration or agree with what is going on in Washington, as citizens, we have an obligation to pay taxes. Even in biblical times, over 2,000 years ago, Jesus was telling people to acknowledge the government and pay taxes as required.
He didn’t add any qualifiers about how the tax money is used by the government or whether we agree with government policies, only that we are required to pay taxes. While paying taxes is mandatory, as good stewards we should follow all legal methods to reduce our tax burden by not overpaying.
The best way to tackle your taxes is to be tax neutral so you don’t get a large refund and you don’t owe any money to the government at tax time.
Keep in mind that refunds have nothing to do with how much you paid in taxes. The amount you paid in taxes and the size of your refund are two totally different things.
A W-2 form, also known as the Wage and Tax Statement, is the document an employer is required to send to each of their employees and the Internal Revenue Service (IRS) at the end of the year. The W-2 form reports the employee’s annual wages and the amount of taxes withheld from his or her paycheck.
People may be celebrating when they get a big refund, but a big refund is not a good thing. If you got a $2,400 refund last year (which is a little less than average) changing your W-4 means you may be able to increase your monthly income by $200 each month. Would you rather have the $200 to spend on your family or would you rather make a monthly $200 interest free loan to the government?
A refund simply means you gave the government more money that you needed to and they gave it back to you. You gave Uncle Sam interest free use of your money during the year.
Think about it this way. You are making a large purchase of $600 and the business offers you a monthly payment plan, interest free, for a year. They want you to pay $100 a month for 12 months, then at the end of the year, they will refund your $600 overpayment. Would you do it? There is no incentive for you. They aren’t going to lower the price or pay you interest on your money. They simply want you to overpay. You probably would not do it, but that’s what happens when you willingly overpay your taxes to get a large refund.
Most people look at their W-4 form when they start a job, then ignore it. You don’t have to fill out a new W-4 every year. But it’s a good idea to update it when needed and check it throughout the year to see if you are meeting that net zero tax goal.
There Is an updated W-4 form for the 2020 tax year which is available from the IRS website (www.IRS.gov/W4) .
The W-4 form comes with a few worksheets that will help you figure out your withholdings. Instead of asking you for the number of allowances, you provide certain dollar estimates, and your employer’s payroll system uses those estimates in deducting taxes from your pay check.
If you’re single and have multiple jobs you would typically file one W-4 for each job. If you’re married, filing jointly, and both spouses are employed, and you both earn about the same amount, you can check a checkbox indicating as much. NOTE: Both spouses need to do that on each of their W-4 forms.
If you don’t want to reveal to your employer that you have a second job, or that you get income from other non-job sources, you can have your employer withhold additional money for taxes or you can pay estimated quarterly taxes directly to the IRS without putting the extra income amount on your W-4.
You’re allowed to give your employer a new W-4 at any time. That means you can fill out a W-4, give it to your employer and then check your next paycheck to see how much money was withheld. Then you can start estimating how much you’ll have taken out of your paychecks for the full year. If it doesn’t seem like it’ll be enough to cover your whole tax bill, or if it seems like it’ll end up being way too much, you can submit another W-4 and adjust.
Once you know how much you are on pace to pay this year, pull out your tax form from last year and do a comparison. Is your salary the same as it was last year? Is it less or more? Do you have additional income this year that you did not have last year? Part time job? Inheritance? Bonus?
Be sure to file a new W-4 when your life changes: you get married or divorced; you have a baby or adopt a child; you buy a house; your salary increases or decreases; or you retire.
This blog started with the Bible verse from Mark 12:17 which said to pay to Caesar what belongs to Caesar. But if Caesar creates rules that allow you to pay less . . . then take advantage of those opportunities!
Checkout the Manage Your Money God’s Way podcast for a tax talk with our guest, Matt Marcoux, CFP co-founder of CandorPath Financial
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