Uncle Sam will take a smaller tax bite each month and still owe you in the spring

As the IRS cranks up its refund-check-writing machines around the country this month, there’s a good chance that – once again – the average size of those checks will hit an all time record high. Last year, the total amount refunded to individual taxpayers broke the $300 billion mark for the first time. More than 110 million taxpayers got refunds averaging $2,753.

Undoubtedly, the surge of cash contributed to the economic recovery. But there’s a dark side of this story, too. An average refund of $2,753 means that the 78% of taxpayers who get refunds allow the IRS to take an average of nearly $230 a month more out of their paychecks than the government deserves.

But here's the good news: There's an easy way to put an end to that overwithholding. All you have to do is file a revised Form W-4 with your employer. The information on the W-4 determines how much federal income tax is withheld from your checks. The more "allowances" you claim on the form, the less tax is withheld from your pay.

Let's go back to that average taxpayer. If he's in the 15% tax bracket -- with taxable income between $8,350 and $33,950 if he's filing a single return or between $16,700 and $67,900 if he's married filing jointly -- claiming an extra five allowances would reduce withholding by about $230 a month. He'd get an extra $230 in his paychecks each month, and the IRS would still be withholding enough to cover the tax bill on his earnings for the rest of the year. And because he's already suffered through months of overwithholding, he'd still get a tax refund of more than $1,000 next spring. How do you know how many allowances to claim to match withholding to your actual tax bill? Worksheets that come with the W-4 will help, and you can get more detailed instructions in IRS Publication 919, How Do I Adjust My Tax Withholding? Or you can struggle through the IRS's online withholding calculator.


It is my intent for you to accomplish two important goals:

1) Get you motivated to grab a W-4 to pinpoint how many extra allowances you should be claiming.

2) Get more of your money to you as you earn it, rather than keep you waiting for a tax refund next spring.

It's a good idea for anyone who received more than a $500 refund or owed more than 10% of their total tax bill to adjust withholding. Most people fill a W-4 out when they first take a job and don't ever see or think about it again. But you can change the number of allowances at any time.

Some taxpayers, especially two-income couples, may find that they're underwithholding even though they're claiming zero allowances. The IRS solves this problem with a line on the W-4 that lets you tell your employer how much more to take out of your paycheck.

By Kevin McCormally,

In the 18 years that I have been in the mortgage business, I have successfully closed over 3,000 loans that total to almost $1 billion in production. My goal is to make your mortgage experience as easy as possible. It is also my goal to help my clients save money. Call me today for our referral partners who can give you advise on whether it is a right time for you 864-320-5102