How can I have a lower tax return?

[FirstTimer90]

I was told that I may be filling out my w-4 (I think that is what its called) incorrectly. That I need to check different boxes so I do not receive a refund or at least as much of a refund. By getting a refund as I am sure everyone here knows, I have given away an interest free loan for the year.
Can anyone help me better understand how I can fill out this form so I do not receive these refunds? thanx

[btctony]

I understand the part about not wanting to loan the govt your money, but why is this such a big deal? You're getting it back anyway. Personally, I would rather pay a little too much in taxes and get something back than have to wonder all year long how much I'm going to owe the IRS.

I'm curious to see what others think though. If there was a sure fire way to fill out a W-4, so that you would not end up paying too little in taxes and end up owing, my opinion of the subject might change.

[feh]

I'm curious to see what others think though. If there was a sure fire way to fill out a W-4, so that you would not end up paying too little in taxes and end up owing, my opinion of the subject might change.

There's no way to guarantee you won't owe. The idea is to get it as close to zero as you can; some years you may get a small refund; others you may owe a bit.

OP - here are some google results that might help:

https://www.google.com/search?q=w-4+exemptions+explained&oq=w-4+exemptions+

[doingitallwrong]

The IRS has a withholding calculator that is probably going to be the best estimate you can get of what you should claim on your W-4.

I'm a newbie so can't post links, but if you go to the IRS dot gov website and search for "withholding calculator" it should come right up. (or use the main website address and add /Individuals/IRS-Withholding-Calculator )

You can check it in June or July, or whenever during the year, to see if you're still on track with your withholding.

[BruceNeil]

I understand the part about not wanting to loan the govt your money, but why is this such a big deal? You're getting it back anyway. Personally, I would rather pay a little too much in taxes and get something back than have to wonder all year long how much I'm going to owe the IRS.

I'm curious to see what others think though. If there was a sure fire way to fill out a W-4, so that you would not end up paying too little in taxes and end up owing, my opinion of the subject might change.

I am not sure what the OP wants to do, but if I had the option to invest my money all year and pay taxes in April 2014 on whatever I earned in 2013, I would do that in a heart beat! Why would you want to give away your money to have it given back to you later? just because you do not trust yourself to save money or not spend it on a new car? Put 1/3 of your pay check away in a 1% savings account if you are worried about spending and you will come out ahead. Do this for the 40+ years of your working lifetime and youll have tons more cash by the time you retire.

[kork13]

I use this site for most of my W4 & tax withholding calculations. They'll even generate the filled-out W4 form for you to just print out & submit to your HR folks.

Paycheck City

FWIW, I do think it's worthwhile to aim for a zero return. Sometimes it's a bit unknowable, but I can generally get within +/- $300 by updating my W4 once in January & again in July (if necessary).

[btctony]

I am not sure what the OP wants to do, but if I had the option to invest my money all year and pay taxes in April 2014 on whatever I earned in 2013, I would do that in a heart beat! Why would you want to give away your money to have it given back to you later? just because you do not trust yourself to save money or not spend it on a new car? Put 1/3 of your pay check away in a 1% savings account if you are worried about spending and you will come out ahead. Do this for the 40+ years of your working lifetime and youll have tons more cash by the time you retire.

Maybe I'm looking at it wrong, but I guess I don't get your point. It isn't as if you're losing out on investing the money over a 40+ year period. The IRS isn't taking it and holding it for 40+ years. You're getting it back every year, so essentially, the only thing you've lost is interest you could have made on whatever your refund was during your 1st year of paying taxes.

Let's say on average you get back 1K. The $10 I could have earned in interest on a savings account doesn't seem worth it to me. In 40 years, $10 grows to $14.92 at 1% interest compounded monthly. I feel like my time is better spent doing other things.

[corn18]

Maybe I'm looking at it wrong, but I guess I don't get your point. It isn't as if you're losing out on investing the money over a 40+ year period. The IRS isn't taking it and holding it for 40+ years. You're getting it back every year, so essentially, the only thing you've lost is interest you could have made on whatever your refund was during your 1st year of paying taxes.

Let's say on average you get back 1K. The $10 I could have earned in interest on a savings account doesn't seem worth it to me. In 40 years, $10 grows to $14.92 at 1% interest compounded monthly. I feel like my time is better spent doing other things.

For me, it's more about the satisfaction of me keeping the money in my bank account vs. the gov't having it. No rational reason other than mental. Other folks like to get a refund and use that as a means of saving money. Whatever works.

To the OP, this site has never let me down:

IRS W-4 Withholding Calculator

Do it once in Jan and again later in the year to see how you're doing.

Tom

[BruceNeil]

Maybe I'm looking at it wrong, but I guess I don't get your point. It isn't as if you're losing out on investing the money over a 40+ year period. The IRS isn't taking it and holding it for 40+ years. You're getting it back every year, so essentially, the only thing you've lost is interest you could have made on whatever your refund was during your 1st year of paying taxes.

Let's say on average you get back 1K. The $10 I could have earned in interest on a savings account doesn't seem worth it to me. In 40 years, $10 grows to $14.92 at 1% interest compounded monthly. I feel like my time is better spent doing other things.

I am not sure which parts you are struggling to understand but I will try to break this down for you in a simple way.

I cannot post links but you can research this yourself, a link I found shows the average return on average from 2007-2013 for this country is $2,881 (not $1,000). Also from my research I think the S&P 500 over time returns about 10% per year but I welcome a correction if that is wrong.

So look at it this way, the $2,881 you loan out interest free is paid back and then taken again each year, so assume this is the same $2,881 that continues to be taken and given back. but lets pretend this time that you can keep that $2,881 and invest it in an S&P Index fund over about a 40 year period (assuming you pay taxes for about 40 years of a working life) and without funding any more money into this account you will have a total of $130,391.92

is your time better doing something that will earn you less than $130,391.92?

[corn18]

I am not sure which parts you are struggling to understand but I will try to break this down for you in a simple way.

I cannot post links but you can research this yourself, a link I found shows the average return on average from 2007-2013 for this country is $2,881 (not $1,000). Also from my research I think the S&P 500 over time returns about 10% per year but I welcome a correction if that is wrong.

So look at it this way, the $2,881 you loan out interest free is paid back and then taken again each year, so assume this is the same $2,881 that continues to be taken and given back. but lets pretend this time that you can keep that $2,881 and invest it in an S&P Index fund over about a 40 year period (assuming you pay taxes for about 40 years of a working life) and without funding any more money into this account you will have a total of $130,391.92

is your time better doing something that will earn you less than $130,391.92?

I think it's even more interesting to look at it as an aggregate of all refunds. Each year, taxpayers loan the USG just over $310B in the form of tax refunds. Figure a modest 5% ROI over that year and that is $15B in in growth that the taxpayer could have realized vs. loaning it to the USG. Amortize that over 40 years and see what that looks like. @ 8% ROI, that would be $651B of lost growth because of tax refunds. That's not chump change.

Tom

[BruceNeil]

I think it's even more interesting to look at it as an aggregate of all refunds. Each year, taxpayers loan the USG just over $310B in the form of tax refunds. Figure a modest 5% ROI over that year and that is $15B in in growth that the taxpayer could have realized vs. loaning it to the USG. Amortize that over 40 years and see what that looks like. @ 8% ROI, that would be $651B of lost growth because of tax refunds. That's not chump change.

Tom

with all that extra money tom, shouldn't it be easy to keep Social Security going strong for centuries to come?

[corn18]

with all that extra money tom, shouldn't it be easy to keep Social Security going strong for centuries to come?

Nah, the gov't wouldn't know how to invest that $310B. They just spend it and then borrow more to cover their expenses. Wish we could do that.

[BruceNeil]

Nah, the gov't wouldn't know how to invest that $310B. They just spend it and then borrow more to cover their expenses. Wish we could do that.

there may not be any hope for them


I would be curious to hear what tony46231 has to say about all this

[autoxer]

I understand the part about not wanting to loan the govt your money, but why is this such a big deal? You're getting it back anyway. Personally, I would rather pay a little too much in taxes and get something back than have to wonder all year long how much I'm going to owe the IRS.

I'm curious to see what others think though. If there was a sure fire way to fill out a W-4, so that you would not end up paying too little in taxes and end up owing, my opinion of the subject might change.

You don't have to wonder all year long how much you will owe. You can estimate it. If you can estimate your income and deductions, you can calculate the total that you will owe and compare that to how much is being withheld. Use the previous years tax return as a guide and adjust the numbers for the current year.

There is no sure fire way to fill out a W-4, because there are so many factors affecting your tax beyond the paystub. But once you have estimated your tax liability, a paycheck calculator can help you get pretty close to withholding the right amount. And you can always adjust it in the middle of the year, if you are going to far in one direction or the other. Just fill out another W-4 and give it to your employer.

This may not work well for people that tend to spend their entire paycheck, but for people that invest and plan for the future, it's better to hang onto your money and owe a little at the end of the year.

[JoeP]

We just look at last year's outcome and ask our tax preparer/CPA what we should do so that we get as close as possible to getting no refund and owing no money. Then that advice is applied in the next year.