Super Basic Wealth Hack--Taxes And Your W4

Danno RedDanno Red Practical Man
edited March 2015 in Wealth Hacking

Another basic "hack" everyone should be practicing if aiming to optimize their finances is to setup your federal withholdings on your W4 (US only of course) to result in you OWING just under the maximum allowed without penalty. Some people celebrate a tax refund but this is actually costing you a significant financial opportunity. Of course, pay your quarterlies on-time and follow the advice of your tax professional. 


 


Here's a blog post I wrote with some basic examples and tips included for illustration:


 


https://medium.com/@Aydoptimize/why-getting-a-tax-refund-is-a-bad-thing-5bf685e60145

Comments

  • Just updated my W4 to make this happen. After reading that it all makes sense. Good article


  • Danno RedDanno Red Practical Man

    Thank you for reading and the feedback! I love it that you employed my advice, it really makes me feel like I am making a difference, even a small one for some people.


  • So all i need to do is put $1000 withholding in my W-4 and they will start sending monthly checks to me?? or do i need to notify them to send them?


     


    Its a bit confusing because I don't make that much from my full time job so I should expect more money to go towards taxes right? 


     


    But should see it coming back in the form of refunds? Sorry if this is basic tax info i'm new to Uncle Sam and his system...


  • Danno RedDanno Red Practical Man

    I'm no accountant but with the limited information you're providing here there's no advice I can give you. Withholding amounts are what an employer has been instructed by you to send to the feds on your behalf to fulfill your liability which is determined by your end of the year income. Do you have two (or more?) sources of income? If so, and taxes are only withheld from one stream (FT job) then you'll want to make sure you estimate to the best of your ability what your total income for the year from all sources will be, what your total deductions/credits will be and from that what your total tax burden will be. Then, knowing that number, make sure your W4 withholding amount covers that...or, by my tip, almost covers it. The goal is to not get money back but to owe money at the end...that's the strategy of not giving the IRS an interest-free loan. They won't do the same for you. But be mindful of the complexity of tax law and the wide range of deductions, credits and taxes that may apply to you. 


    Self help abounds via Google and the IRS' own website but if in serious doubt and significant income comes from your own private ventures, consult a tax professional. There are some situations that "super basic wealth hacks" just don't have any business and from what you've told me there's no way I can make that call for you.


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