Reconsider Your W-4 Withholding

By Ray and Dana Brandon

Ray’s Take It’s that time of year again. Your mailbox is receiving the annual tax form allotment. In addition to filing your income tax, take time to evaluate your withholding. It might be that you should adjust the deductions on your W-4 form to change the amount withheld from your paychecks.

Among things to consider: this year paychecks reflect an increase in Social Security taxes. You’ve probably already noticed that shrinkage in your take-home pay. That might make a difference in handling monthly expenses.

On the other hand, last year the IRS sent out more than 104 million tax refunds averaging almost $3,000. For a lot of people, that extra money could have come in handy during the year.

In the past, getting hefty tax refunds was frowned upon – why should you give the government an interest-free loan? However, with interest rates at generation lows, you might be better off with a higher withholding as a means of forcing you to save. Like your 401(k) or 403b this is just another option for saving automatically.

Having money automatically deducted from every paycheck and then handed back to you in one lump sum to deposit or (hopefully) invest could give you a bigger sense of satisfaction and achievement.

If you’ve had a child, gotten married or divorced, or had some other major change in your circumstances, you definitely need to revisit your W-4 withholding situation.

Just visit your company’s HR office and ask for the form. The W-4 Personal Allowances Worksheet can provide some idea of what would be a good withholding amount, but there are so many rules regarding federal income taxes, it might be best to get professional advice.

However, if you got a big refund this year, don’t feel like you made a mistake. Just put that money aside to be one large step closer to your savings goals.

Dana’s Take There were probably more than a few people surprised to see that their take-home pay was less when they got their first paycheck of 2013. After all, most of the news focused on higher taxes for those making large sums.

If your income is $50,000 annually, the tax increase will amount to about $1,000 over the course of a year, which isn’t that far from $100 a month.

Determine what you can cut now instead of going on as if nothing changed. If you’re paying for Internet service, consider dropping cable TV. Virtually anything you watch can be streamed for free or at least less per month. Also, consider dropping your telephone landline or changing cell phone and data plans. Search your budget for monthly services that can be dropped, such as Hulu Plus.

You could even see the need to cut back as a chance to reconfigure your entire budget. That could lead you to greater financial security in the long run.

Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at raybrandon@brandonplanning.com.