How to Avoid Giving the IRS a Big Interest-Free Loan, and Waiting on an IRS Tax Refund
From a long time ago, do you remember such a thing as a W-4 form (known to accountants as the Employee's Withholding Allowance Certificate) - you got to sign it when you first landed a job with your employer. If you never gave it a second thought, you'd probably love to hear of it now what with it being tax season and all. The form, when you first fill it out for your job, gives your employer information he needs, to know how much to deduct off your paycheck for federal and state taxes. Do you remember the line that asks how many withholding allowances you want to claim? That's the one. But here's the kicker with withholding allowances - the more you claim them, the more money you get to keep from the IRS. When people don't take advantage of these deductions, they let go of a large chunk of their paycheck to go to the IRS every month. That's money they don't even owethe IRS. They're just basically giving the IRS a big loan until they get an IRS tax refund check a year later. What might be the point of paying more taxes than you have to, and hankering after an IRS tax refund? If you never had a chance to know what you were doing when you first signed your W-4, that's just fine. You have the right to go and submit a new form any time you wish.
So what kinds of allowances they want to claim? Here are some of the most useful-
1.You can claim tax exemptions on your spouse, or your children or any other dependents. Of course everyone knows this; what most people don't take advantage of are things like child tax credit, education credits. All these give you extra withholding allowances for the tax credit you estimate you can claim. If you're not so sure what ones you qualify for, any popular tax software should help you out.
2.The IRS sees business losses the same as business expenses. Anything that is spent on supporting your business, or losses for your business or profession, qualifies you for a withholding allowance. You can claim these on anything you lost trying to rent out a property, raising crops on your farm or anything.
3.If you are contributing to your retirement account, those are going to qualify you for a withholding allowance too. As will the alimony you pay out. Itemized deductions are the best opportunities in withholding allowances. You get a great chance here to keep a big part of your money away from the IRS' clutches (and the IRS tax refund). They don't even have to be actual serious deductions, or anything. They just have to be things that you can reasonably be expected to believe are valid deductions.
If you pull down, say, $15,000 a year, each one of these allowances should probably get you an extra $40 or $50 every month in take-home pay. Why would you do without that, and waiting on that IRS tax refund? The whole trick of the game is, to give the IRS what they need, but just enough to avoid fines or penalties. Some especially crafty plans involve under-withholding on your income for the first several months of the year, and then filing a revised W-4 tothen over-withhold in the last month. If you are not that adventurous, you could just do it the easy way though.