We all know taxes are a necessary evil of living in America. It’s cool to get a refund, but did you know that means you’ve given the government more of your money than you needed to? 🤔 So how do you know what the right amount should be?
Here are Five Fast Facts on withholding the right amount of taxes:
- 💲 Withholding - Most employers withhold a portion of your paycheck and send it to the government on your behalf. They withhold whatever amount you set based on a form that you fill out when you start working for them or whenever you make a change (which you might do if you get a big raise). Do people get big raises anymore…?
- ❓❗ Form Confusion - The problem is that the withholding form is super confusing. Even the experts agree - you can fill out the checkboxes, but there’s no real explanation of how they affect how much of your money is withheld. Not even if you speak governmentese.
- 🔍 Double Checking - Anytime you make a change to your withholding form, you should double check it on your next couple of paychecks to make sure it’s right. If not, contact your HR peeps for corrections. But nicely…remember, they’re HR so you don’t want to piss them off!
- 💵 Effective Tax Rate - It helps to target your “effective tax rate.” This is different from which tax bracket you’re in. Your tax bracket is the highest bracket that applies to your income level. The effective tax rate is if you simply divide your total tax (line 24 on last year’s tax return) by your taxable income (line 15). It’s okay to use a calculator.
- ⏲️ Past And Present - Another way you can guess how much should be withheld is to look at last year’s info. If you’re making about the same, then you can withhold about the same and get about the same result. Adjust up or down as needed.
🔥Bottom line: The perfect amount of withholding would mean you owe (and get a refund of) precisely $0 on your taxes. That’s kinda like threading a needle while riding a horse, so good luck with that. But, you can get reasonably close, especially if you make the same amount of money from one year to the next. Some people overestimate their withholding to ensure they get a refund (and more importantly, won’t have to pay anything), but that’s giving the government more of your money than is needed. And do we really trust them to be responsible with it while they’ve got it?
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How do you estimate the amount of withholding from your paychecks?
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