It’s pretty common for someone to ask: “How can I make more money?”
The question is usually asked in a sarcastic tone, so my response is usually: “Legally or illegally?”
Of course, there is no quick way to make more money. However, there is an extremely easy way to increase your take-home pay and you can do this right now. Just decrease how much tax is withheld from your paycheck.
We’re in the middle of tax season. Most of you will be getting a tax refund. I know this because 75% of the tax returns filed for 2010 received a refund. And the average refund was almost $3,000!
The common belief that tax refunds are a good thing is simply WRONG! Let’s say that $3,000 tax refund was spread out over 12 months of paychecks. That would increase your take-home pay by $250 per month!
The reason why there are so many tax refunds is that taxpayers are having too much tax withheld from their paychecks. The IRS holds your money during the year until you do your taxes. Then around this time of year, you do your taxes and calculate that your tax bill is much lower than what the IRS collected. The result is a tax refund.
The ironic thing about all this - the taxpayer determines how much the IRS takes from their paycheck each month. For some reason, very few people are aware of this fact.
If you received a tax refund for 2011, then here are the steps to fix the problem:
Step 1: Get your 2011 Federal tax return and go to Kiplinger’s Tax Withholding Calculator. Answer the three quick questions and get your results for how many more allowances you should take.
Step 2: Contact your HR Department to pick up IRS Form W-4, or download one here. Complete the form and give it to your employer’s payroll department. Remember that you INCREASE the number of allowances to DECREASE the amount of tax withheld. It’s a bit counter-intuitive.
That’s all you have to do. Your next paycheck will have less tax withheld and your take-home pay will increase. That tax refund will disappear too. But that’s a good thing because no one needs to give the government an interest-free loan.
Steve Doster, CFP®, is a Certified Financial Planner offering fee-only, hourly financial advice for do-it-yourself investors. Visit his website or his Facebook page to see his favorite personal finance article of the week.