Q: I heard you on The Yolanda Adams Show, and you were talking about taxes. I need to know what is a reasonable amount of withholdings for a single person, state and federal?
A: I can’t answer your question directly, because how much you withhold from your paycheck to pay your taxes depends on your personal tax situation. There isn’t a “general” rule, because everyone’s tax situation is different.
But let me explain the withholding thing. Although tax day has passed, it’s good to have this discussion now, because far too many people get a tax refund (state and federal) and they shouldn’t.
The IRS has reported that the average refund this year was $2,683, up 13% from $2,371 last year.
When it comes to a tax refund, it’s better not to receive. Or, if you do receive, it’s better if it’s just a little.
I know. Some of you are rolling your eyes at me right now thinking I’m crazy. You wait all year for your tax refund. But that’s just the problem. Unless you have a change in your tax situation, getting a refund means you let the government keep your money interest-free for a year.
People can’t wait for a refund, so that’s why they try to increase what’s taken out of their paycheck every pay day. However, the money-smart thing to do is change your W-4 (Employee’s Withholding Allowance Certificate), so that you receive more money in your paycheck.
If you are a wage earner, you pay your taxes by having the money withheld from your pay during the year. You can adjust your withholding by filing a new W-4 with your employer at any time.
If you don’t pay enough in taxes during the year or you earn additional money that is not subject to payroll taxation, you may owe taxes at the end of the year. That’s not good either. You should strive to have your withholdings match your actual tax obligation.
If you allow too much tax to be withheld, you get a refund.
You can determine how much is tax is taken out of your pay by the number of allowances you claim on your W-4. The W-4 has a worksheet to help you figure out how many personal allowances to take. The allowances are based on the tax deductions or credits you expect to claim on your tax return.
If the form is a bit confusing, you can also use the IRS online withholding calculator. You will need your most recent pay stub and a copy of last year’s tax return, which you should have handy. Also read IRS Publication 919, “How Do I Adjust My Tax Withholding?” (pdf)
You should increase the number of allowances you take (so you can bring home more money) if, for example, you have a child or you bought a home or you know you will have a deduction for unreimbursed medical expenses.
I know that the reason people like to get a big refund is that they can’t trust themselves to save the money. If that’s you, get over your fear that you will waste the money; set up automatic deductions from your paycheck. Have the money go into a bank account in which you don’t get an ATM card.
Look, if you have debt that needs paying off, think of all the interest you are paying. If you get your money during the year, you can cut down on that interest expense.
So let me swing back around to the question. If you are a wage earner, take this time now, early in the 2009 tax year, to figure out the right withholdings.
Don’t let Uncle Sam hold your money all year. As you can see, Sam isn’t that great in handling his money either.