You Could be Sabotaging Your Savings by Claiming the Wrong Tax Allowance
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- By Elle Martinez
- February 20, 2014
When money is tight and it doesn’t look like your job will be offering you a raise anytime soon, saving money can feel like an impossible task. However, there is something you can do to maximize how much money you get each paycheck and help you build up your savings account. What is it? It’s making sure that your withholdings are correct for your situation.
How Filling Out Your W-4 Can Build Your Savings
When you first started working at your current company, the human resources department probably gave you plenty of paperwork to review. Besides sharing company policies and employee benefits, however, you also received a W-4, also known as Employee’s Withholding Allowance Certificate.
Based on the allowances you calculated on that W-4, your employer will automatically deduct your tax withholdings for the year.
Having this completed correctly makes it easier come tax time when you have to file. If you under-withhold for the year, you’ll have a big tax bill to pay come April — not a great situation to be in. However, if you’re overly aggressive and withhold too much from your taxes, you’ll shrink your paychecks for the entire year, which can hurt your ability to save money.
When filling out your W-4, there are a few questions to consider that affect your allowance:
- Can someone else claim you as a dependent on your taxes?
- Are you married? Does your spouse work?
- Do you have any children?
- Are you the head of household (according to the IRS definition)?
Even though your job wants your form submitted as soon as you start working with them, it is your responsibility to make sure that the information is accurate to the best of your knowledge.
Related article: 4 Ways You’ve Been Paying Too Much to the IRS
When Life Changes Up
The one constant in life is change. Big life events such as getting married, having a child (or children) or getting a divorce can have a big impact on your taxes. That’s because your exemptions and allowances can change based on these situations. The number of allowances you claim when single is different than if you are married.
If you haven’t updated your information in a while, it’s possible you’re withholding money that you could be using now to increase your financial cushion. While getting a larger tax refund once a year may be some people’s preference, perhaps you’d like to have bigger paychecks as you go through 2013 to be put toward a high-interest savings account rather than gaining no interest with the government. You can also use that money immediately in emergency situations (like a car repair or job loss).
I’d like to hear from you about how you maximize your paychecks and build savings throughout the year. Have you adjusted your W-4 at work recently? Do you prefer to get more throughout the year or do you prefer getting a lump sum for your tax refund?