Paying Yourself First

Can You Use an Extra $500 a Month?  No strings attached?  Not a loan, but a gift?  I'm going to show you how to get it without any gimmicks, so read on.

This column needs to be written and disseminated at least once a year, and this is the ideal time to do it.  Unfortunately, for most of us, this is the only time during the year that we bother to think about our federal income taxes, and then only because the day of reckoning is fast approaching.

Most of you, my readers, are close to or in my age bracket, so the opportunity I'm going to present might not fit your circumstances.  However, we all have children and grand children who can benefit from the advice I'm about to give.  Send or print out this column for them to read and you'll be helping them immensely.

I used both Tax Act and Turbo Tax to prepare my taxes for 2013, and both bugged me all through tax season to "file now and get your maximum refund."  Well, I am not getting a refund, so why would I file any earlier than the last week around April 15?  Of course, I also noticed that the in-store tax preparers are, as always, hawking their "maximum refund" and "Get your billion back" ads on TV.  It flies in the face of logic, but I suppose it does attract customers.  Here is my take on it.

Approximately 150 million federal tax returns were filed for the 2013 tax season, the one that covered the year 2012.  Of those returns, over 110 million - 73% - of the filers claimed tax refunds.  The average refund claimed for those 110 million returns was a shade over $2,800.  That translates to a whopping $310 billion in over-withholding in 2012 alone.  If you don't believe it, here is the link to the statistics. To make this column a little simpler to understand, I'm going to take the liberty to round off the refund amount to $3000.

I know these numbers are difficult to place in perspective on an individual level, but let me put it this way:  We loaned the United States Government about one-third-of-a trillion dollars interest-free in 2012.  Experience has shown that we continued to loan that much or more in 2013, since the numbers have risen every year for the past decade.

Do you think the government spent that money, or did they keep it in a lockbox so that the IRS could refund it to you when you filed your taxes?  Don't be too hasty with your answer.  Think about it on a personal level.  If I gave you $2,800 today with no strings attached except that you would have to pay it back next year, what would you do with it? Would you find some use for it, or would you put it in a safe place, untouched, so that you could pay me back next year?

Now that you have (I hope) arrived at the same conclusion that I have, I'll ask the next logical question.  Why do we continue to loan all that money to the feds, whom we know to be fiscally irresponsible, instead of keeping it for ourselves and putting it to much better use?

For instance, if you were to invest that amount in an IRA or 401(k) with a 5-percent annual return -- not hard to get in today's indexed mutual funds -- over a 40-year work career, you would have a retirement nest egg of over $350,000.  And just think, that's money that you aren't currently using at all, because you're loaning it to the government on a continuous basis.  That's right, even though you do get a 'refund' every year, you are still out the same amount from your current income tax withholding.  It's a cycle that never ends!

Are you convinced that over-withholding of taxes to get a refund at tax time is not a good idea?  If not, quit reading right here, because you will never learn from the rest of this column.

Okay, to those of you who are still with me, my illustration above is only one of many options as to how you could benefit from the extra $250 in each bi-weekly paycheck you get.  It would be an instant raise in income to use as you see fit.  And getting it is as easy as requesting and filling out a new W-4 form, called a Withholding Allowance Certificate that is available online or at your workplace. 

The W-4 includes a worksheet for you to determine how many exemptions you can take and how they will affect your take home pay.  It allows you to fine tune your withholding so that your deducted taxes during the year are approximately equal to what you will owe on tax day.  In fact, you should try to be within $100 of your tax liability, and the W-4 is the instrument that enables you to achieve that.

If you are self employed, or run your own small business, you can achieve the same thing by downloading and using the 1040-ES, Estimated Tax Worksheet and Scheduler.  It will accomplish the same goal for you.

The side benefit of  changing your withholding to stay close to your actual liability is that you will no longer be overfeeding the insatiable mouth of government.  The behavior of our spendthrift Congress can be muzzled if there isn't an excess of funds in the Treasury Department for them to spend.  You can help to reign in those huge deficits and the fat national debt by merely submitting your new W-4 or 1040-ES and convincing others to do the same.

So, unless you dislike the idea of getting a raise in your pay while helping to reduce the national debt, I suggest you take my advice and submit that revised W-4 or 1040-ES post haste.  And use the first enhanced pay to treat yourself to a night out and dinner -- you deserve it for being smart enough to take the first step.