Looking for ways to save money now and for the future can seem like a dream. However, the IRS (Internal Revenue Service) offers two painless methods to reduce your taxes, which puts more money in your pocket.
The IRS recommends that, if you receive a significant refund each year, you may want to consider taking a portion of the refund each pay period. The refund from the IRS is an interest free return on the governments’ use of your money.
If you increase the number of withholdings on your W4, you can receive additional money each pay period. Now, this will reduce your year-end refund, but if you take the additional cash and open a savings account, you can earn interest and have a larger ‘refund’ at the end of the year. Click here for a quick and easy savings calculator.
The withholding allowance changes annually. For 2013, one withholding allowance reduces your taxable income $75.00 each week. You should realize a tax savings of approximately $20 per week. If you put the $20 in a savings account each week, at the end of the year you will have $1,040 plus interest.
Your personal refund can be used to determine the number of withholdings you can safely use. First, if you received an earned income credit refund, subtract this from the refund you receive. Divide your refund by $20. If the result is more than 52, you can safely withhold one. If it is greater than 52 and less than 100, use two withholdings. Depending on your refund amount, you may have five or more withholdings. Now, this is not an exact science, so do not cut it too close. However, you should take the non-taxable income you receive each payday for your needs.
Another way to save money is to invest in your company’s 401K. The percentage of your income you invest is subtracted from your pay period’s gross pay BEFORE federal and state taxes are calculated. This not only reduces the amount of tax you pay, it helps you save for your future.