Thursday, January 25, 2007

 

hmm, to adjust or not to adjust

Today is W2 day at work and I've already gone online and filed my return, $741 refund which is direct deposited into savings. Now I'm considering adjusting my withholding. The IRS has a handy withholding calculator, you input your 2007 estimates (salary, retirement contributions etc) and they recommend how many allowances to claim. IRS says my estimated 2007 refund is approx. $800 and they recommend claiming one allowance which I already do. But alternately they say that if I change my allowance to two, I will end up owing about $50. Now I figure that if I change to two allowances, that the $800 refund I am giving up should be reflected as additional monies in my paycheck. So subtracting the $50 they say I will owe and dividing by the number of paydays left this year, that comes out to roughly an extra $34/check. My conundrum becomes this: will I fritter away the extra money each check or be good about putting it directly into savings? If I'm going to be a fritter-er, its probably best to stick with the refund. And it is quite nice to have a nice chunk of change going into my savings at the start of the year. Sounds to me like I'll just stick with the status quo, but if my refund ever gets larger I'll have to visit this issue again.

5 Comments:

Anonymous This Little Piggy said...

I recommend changing your deductions to 2 for the next few months and if you aren't disciplined enough to save it, then change back. Compound interest is the way to go.

5:22 PM  
Anonymous Anonymous said...

I agree it's better to have the money in an account making money than with the IRS not making money. However, you would have to consider whether you would owe a penalty and how much that would be? If would owe only $50 the penalty would be low or non-existent.

9:44 AM  
Blogger fin_indie said...

Stick with the refund for smaller amounts like this. You don't want to owe money. Later on, when the possible refund is larger (ie. when you own a house), you may want to further tweak your W2.

9:35 AM  
Anonymous cami said...

Why not go with the 2 withholdings, and set up an automatic deposit of $34/paycheck? Seems like a winning plan to me.... compound interest, and a savings account that, if necessary, can be 'raided' to pay taxes.

3:44 PM  
Blogger Pat said...

I agree with Cami. I'd set up an automatic deposit of the $34. That way you wouldn't be tempted to fritter it away. If you do wind up having to pay taxes, you'll have the money to do it.

4:35 PM  

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