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How to Adjust Your Income Tax Return to Save More Towards Your Financial Goals During the Year

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I’ve had plenty of people contact me this week about getting “chunky” tax refunds.  Barring the fact that they may have taken advantage of the Home Buyer Tax Credit and/or qualify for Earned Income Credit, most people should recognize that getting a large federal income tax refund is not a great financial strategy.  In fact, it is the opposite.  This is another factor that keeps the rich, richer…the poor, poorer and the middle class, middle class.  Why?  The Urban Dictionary calls this financial phenomenon…

Intaxication – the state of euphoria when you see the amount of your income tax refund, before you remember it was your money all along…”I was in a state of intaxication when my refund check arrived in the mail”

I discussed this earlier this year in a previous blog post, “Why Getting A Large Federal Income Tax Refund Put the Joke on You” and made available a free podcast for our community to download.  On this podcast was Dennis Johnson, a Certified Public Accountant, who has been helping people file their taxes for over 25 years.  As long as he’s been doing that, it is ALWAYS a teaching topic for every taxpayer to be better stewards of their paychecks.

Getting a large federal income tax refund is literally, giving Uncle Sam more of your paycheck each month so the government can spend and invest…and the government give you nothing back in return the following year for your generosity.  In other words, you end up giving up a ZERO PERCENT INTEREST loan and don’t even get as much as a thank you card from your politicians…while most people figure out how to make ends meet each month.

I just had a close friend of mine call me up saying, “All these years I’ve had claimed Married and ZERO on my taxes”.  My friend is married, with twin boys and admits that he has been getting large tax refunds every year and purchasing new bikes, camping gear and TV entertainment equipment each spring.  He and his wife has been telling each other that they will start their IRAs, college savings plan or begin savings towards other financial goals but kept saying, “We’ll do it next year”!

Do you want to start taking action now, this year, so you can begin reaching towards your financial goals?  Living paycheck to paycheck and keep telling yourself that you don’t have anything left to save?  The missed opportunity may just be in your paycheck itself.

Head on over to the IRS Tax Withholding Calculator to figure out how you can adjust your W-4 form with your employer.  That way you can see a higher increase in your take home pay and not have to wait to the end of the year for your own money in the form of a tax refund.  Depending on your income, this may give you an extra $100-500/mth.  Sure, you’ll get less of a federal income tax refund next year…but it’s all about the now!  Don’t be tempted to spend this increase…you should save, invest it or pay down consumer, non-deductible debt!

In Robert Kiyosaki’s book Rich Dad, Poor Dad, one of his key financial teachings is just this.  Taxes are one of the last things the rich end up paying more of.  An attorney working for a big law firm earning $150k has a much different income tax situation that a small business owner who has a gross income of $150k.  The first thing that comes out of that attorney paycheck is taxes.  The LAST THING out of that small business owner’s revenue is taxes because of expenses related to their trade/business in which they can deduct legally. Why do you think even Warren Buffet’s employees have more of their income taxed, than he? I know…that’s another blog post to expand on in the future…so keep checking back!

In the meantime, stop being so patriotic and giving Uncle Sam more than his fair share of your paycheck throughout the year!

Currently there are "5 comments" on this Article:

  1. Joel Wymer says:

    Great article, Matthew. Your point is well taken. We have a choice how we handle the taxes taken from our paycheck and it’s always to our benefit to take control of our own money. We can either use Uncle Sam as a partner to leverage our financial plan or we can make our crazy Uncle and everyone else rich instead of ourselves.
    God Bless and keep em comin…..

  2. Hey Joel! Thx for droppin’ by! You’re on point as well, it’s about taking choice and control into our own hands…cause that’s how CHANGE really happens! Talk soon brother!

  3. Janice says:

    Thanks for this article. It seems that withholding a lot is what helps people “feel safe” around a fear of owing the government. Because no one wants to owe big bucks to the government at the end of the year. So the big refund literally “rewards” taxpayers for staying in fear.

    I get what you’re saying. It’s a tough shell to crack – even for saver-types. Obviously, if a person’s getting back a huge refund for the 2nd year in a row, filing under similar circumstances, it’s a clue that they may have money to put toward they’re real financial goals in life. But I have to admit to a fear of being unpleasantly surprised by an amount I OWE vs. pleasantly surprised by an amount I’ll be paid.

    Is this so uncommon? Would love to hear your comments.

  4. @Janice – Thx for your comment! I totally understand where you are coming from! Dealing with different financial methods than most can bring in the fear factor. It’s natural human reaction. We always have our listeners and students ask themselves this question, “Is it possible for me to know, what I don’t know”?

    How about the “fear” that set in when you decided to launch your business or begin your radio show Janice? With faith you stepped forward because you clearly saw the benefits of doing so.

    On the contrary to having to PAY taxes at the end of the year…I would say that if you were wise enough to have SAVED and INVESTED throughout the year what you normally would have received in a tax refund…you are WAY AHEAD! Even if you had to pay $100-$500, at least you put compound interest or leverage to work for you…and not Uncle Sam. If you made $1000 throughout the year and you had to end up paying $500…then you are still $500 ahead by putting your money to work for you, instead of the government.

    To subside this fear some more, I recommend someone actually go the the IRS’s website (indicated above within the post) and punch in their financial numbers using their calculator. This will reveal what someone can realistically do to adjust their W-4 and not feel that they are doing this blindly. That way, you can clearly see the actual benefits and give you the confidence to move forward.

    Thx for your question Janice!

  5. Social comments and analytics for this post…

    This post was mentioned on Twitter by Nick Salmons: How to Adjust Your Income Tax Return to Save More Towards Your Financial Goals During the Year http://bit.ly/dhYxfw

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