A few weeks ago the American Recovery and Reinvestment Act (ARRA 2009) provision for reducing the withholding requirement took effect, and quite a few folks got pretty excited about it. As I mentioned in this blog entry (and as Geddy Lee was famous for saying), ten bucks is ten bucks. If you consider the fact that there are something like 200 million working Americans, this works out to an additional $2 billion cascading into our direct-deposit accounts every week. That’ll get the economy stimulated, right?
The (your name here) Economic Stimulus Package
What if you could impact this yourself, without government intervention? This being high season for thinking about income taxes, it bears repeating that, if you’re the average American, you could increase your take-home pay with the stroke of a pen – literally – by making a change to your W4 withholding.
According to 2006 statistics, almost 80% of us receive a refund when we file our tax return each April 15. For many folks, it’s a significant, predictable sum. Why not make a change to your withholding and have those funds available to yourself throughout the year? You’d be a hero, stimulating the economy and all, and the government wouldn’t be using your money for free.
“How’s that?”, you ask. That’s right, the government is using your money and paying you no interest, when you have too much withheld from your paycheck. Why not have the use of the money yourself? You could even open up a savings account and pay yourself the interest.
But I don’t want to owe the government anything at tax time. Why not? This is turning the tables on the IRS – you can use their money for free! There are a few caveats, of course: Your withholding and timely estimated payments (when necessary) must total the lesser 90% of this year’s tax obligation or 100% of last year’s obligation, less $1,000. Huh?
Here’s an example: for 2008, your total tax obligation might have been $10,000. For 2009, you’ve had a raise, so your total tax obligation is projected to be $12,000. So you’re required to have the lesser of 90% of $12,000 ($10,800) or 100% of $10,000. And you can be short of the minimum by as much as $999 without penalty. Consult your tax advisor to make sure you don’t make a mistake on this!
I’ve Done It; Now What Should I Do With It?
Use the extra money to open that emergency savings account, or pay a little extra on your installment loan or credit card balance. Start a Roth IRA, or begin taking advantage of your employer’s 401(k) match (while you have it available!). Each of these small steps can be a start in the right direction for improving your family’s bottom line.
For the average person who receives a refund every year, it could make a difference – perhaps not a huge difference at the start, and you most likely wouldn’t see the difference in the overall economy, but it will gradually make a real difference in your economy. After all, that’s what matters most, right?
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
And if you've come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed "advisor's advisor".