Because you never know what you might find!
In my case, it was $2075, enough to cover half of the new $4075 Carrier air conditioner Chris and I had to put on our home equity line of credit at 6.75% in late June one week before our wedding because we didn’t have enough of an emergency fund to cover it outright. I had already mapped out a repayment plan for 2008 that would get the HELOC balance paid off by the end of the year, but on a whim I wandered onto the IRS.gov site this morning and decided to see if I was on track with my federal taxes using their IRS Withholding Calculator.
It turned out that due to the higher 401(k) contribution I was making for the whole of 2007 (10% vs. the 4% I was doing last year) and my failure to lower my W-4 withholding in January 2007, I have been giving Uncle Sam way too much money this year. The IRS calculator told me that based on how much I had paid in federal income tax already and how much more I was projected to withhold for the rest of the year, I would be due a refund of $2075 next April.
While some of you might say, “Cool! Just let things stay as they are; you’ll have a big fat check next year to spend! It’s like an automatic savings account!”, I have to point out that savings accounts generally pay out this lovely thing called interest which dear Uncle Sam generally does not. If you are not carrying any debt, but still habitually use your federal withholding as a virtual piggy bank, please take your head out of your ass and realize that you are simply giving the government a big, fat, interest-free loan every year by doing so. You would do a lot better by opening an online savings account at a bank like EmigrantDirect which will pay YOU 5.05% interest and having the same amount that you would normally overpay in income tax automatically transferred to your ED account each pay period. And those of you who do have debt, especially high-interest credit card debt–how stupid is it to tie up your money in unnecessary federal income tax withholding (earning zero interest) when you are carrying credit card debt at 10, 15, 20, or even 30%?
I don’t know about you, but I would much rather have my $2075 this year to pay off my share of the new A/C (which is costing me 6.75% interest) and start off 2008 with no debt except ten more payments on my 2002 Camry and the mortgage. And if I didn’t have any debt to pay off, you can be sure that money would be moving into my savings account to earn 5.05% until I needed it for a true emergency.
According to the IRS calculator, I could liberate the rest of this year’s overpayments with a simple adjustment to my W-4 that would stop all federal income tax withholding for the remainder of 2007. My take-home pay would increase by $124 per weekly paycheck, and all of that extra money could be automatically transferred to the HELOC account. I won’t even miss it since I’ve been happily living without it all this time. On January 1, 2008 I will have to submit a revised W-4 to reinstate my federal withholding, but that is no big deal. I’ll do a better job of estimating my taxes for 2008 and try to get as close to $0 refund as possible.
This is seriously like finding 2k in an old winter coat pocket or getting paid for five minutes (the time it took me to use the calculator and print and fill out the W-4) of work.
After jubilantly dancing around for a bit in the office, I bugged Chris to check his withholding at the site, too. He clearly didn’t see why I was so insistent until I pointed out that he might have enough to cover HIS share of the A/C bill and pay off his USAA credit card balance before the end of the year. THEN he paid attention and grabbed his latest pay stub.
It turned out that he would be owed an even greater refund than me if he kept up his current withholding–$4933, or enough to cover half of the A/C and all of his remaining credit card debt.
I love being right.
So take my advice and spend a few minutes running your numbers through the IRS withholding calculator to see if you, too, have been depositing too much money into the Bank of Financial Stupidity. If not, props to you for being on top of your finances. And if you DO have an account at the BoFS…put in a new W-4 following the instructions given on the calculator’s results page (it will tell you exactly how many allowances to enter on your W-4) as soon as possible and do something smarter with it.
Stuff to do with the extra money (highest priority first):
1. Pay off high-interest debt (credit cards, loans, etc. above 5%)
2. Start an emergency fund savings account at 5% or more if you don’t already have one and set it up to fund automatically.
3. Start or fully fund a Roth IRA or a 401(k).
4. Save for your next major purchase like a home or car.
5. Buy yourself something nice for $50, then put the rest in a CD.
Well, you get the idea. Don’t just fritter away that extra money; make sure you are getting some sort of return whether it’s freeing yourself from an 18% interest rate credit card balance or collecting 5.25% on a one year CD.