How to give yourself a pay raise courtesy of Uncle Sam

Do you hate filing your tax return?

Well I have good news for you. You will no longer need to worry. I have a plan for you to help remove the worry.

Did you get a large refund? Did you owe more than you thought?

We can get that fixed for you, no more large refunds or larger than expected payments. I only want to pay the government what I need to not any more or less than I should.

The Fix is in!

I will show you how to calculate your tax liability and how to adjust your withholding. If you can pull some information, I can walk you through the calculation.

Review you prior year tax return

Start with reviewing your tax return from last year. What income items did you have, what deductions did you have? Make a list of those items. It is likely you will have the same for this year. Ask yourself what will be different? Did you start a business on the side? Did you have more than one job? Do you have rental properties? What about interest and dividends?

Estimate what you will make for the current year

Income from your Job

If you are employed and get a w2 estimating your income is straight forward. How much do you make each pay? How many times during the year do you get paid? Once you determine this you can calculate your income. Most folks get paid every two weeks so there are 26 pays. Keeping it very simple if you made $100 per week times 26 weeks that would be $2,600 for the year.

Business Income

If you have any other type of income from a business or from rental properties you will also need to include that as part of your income. You only pay tax on that portion that is profit. So you will need a profit and loss statement. Estimate as close as you can. If you have these types of income, you most likely can project what you expect to take home after expense. (If you have self-employment income you will also need to pay self-employment tax. So do not forget to calculate that).

Self Employment Tax

Self-employment tax is the employer and employee portion of social security and Medicare tax. For Social Security it is 6.2% and for Medicare it is 1.45%. Combined it is 7.65% and self-employment is double since you pay both employer and employee so that is 15.3% So make sure you add that onto the final result below. You probably want to set up estimate tax payments. That is a bit beyond this article and I suggest you get professional assistance.

Reduce for 401k, 403b contributions

Any contributions you make to your 401k/403b that comes out of your check can be deducted reducing your income. Be careful not to deduct contributions to ROTH, only contributions made on a pre-tax basis can be deducted.

Reduce for HSA, FSA and health benefits

Now deduct any payments you make for contributions to your health savings account (HSA), flexible savings account (FSA) and premiums for health benefits.

Add any dividends, Interest and capital gains

If you have any interest or dividends you need to add them in as income. Same as for capital gains, you can deduct any capital losses only up to $3,000.

Reduce for IRA contributions

Similar to your 401k/403b these contribution can be deducted. Again if you are making contributions to a ROTH IRA these cannot be deducted.

Subtract your deductions (itemized or Standard)

With the new tax law changes most folks will not qualify to itemize. You will need to find your standard deduction amount for your filing status. You can use this calculator from our friends at the IRS. Standard Deduction Calculator

Calculate your tax liability

Now that you have all this information it is time to calculate what you tax liability is going to be. Use the tax tables provided by the IRS. Tables start on page 67.

Compare what you will owe with what you have paid

If you do this before the year begins you can just divide what you owe by 26 if you get paid bi-weekly. if you get paid monthly divide by 12. If it is during the year, you will need to take the amount you project to owe subtract what has been withheld and divide that by the number of remaining pays left in the year.

Adjust as needed

Once you have this information you will need to complete a new w4 with your employer. When it asks for exemptions put 98, this will make the amount from the tables provided to take no tax. On the line where it asks for additional withholding put the amount you calculated above. You will now have a flat amount withheld every pay.

I have been doing this for over 30 years and I do not pay or get a refund each year. This can be very complicated for folks and they just fill out a w4 and put the number of exemptions based on their family size. This generally does not work.

If all this sounds out of your comfort zone I do have an alternative.

Yes our friends at the IRS have created a calculator for you. Yes, you will need to gather all the information outlined above.

Find the calculator here.

Good luck, I have done my own calculations both ways and have come up with similar results. They both work.

Disclaimer

I will end this with a disclaimer, the conclusions are based on information provided by you in response to the questions you answered. This does not constitute written advice in response to a specific written question and I do not guarantee that you have completed this correctly. Therefore I cannot take any responsibility for the results nor can I have any knowledge that you have done this correctly. Therefore I take no liability that you have correctly been withheld and paid your taxes correctly.

In Conclusion

You could seek out professional assistance. Any tax preparer should be able to assist you with this. Do not let the government have an interest free loan. And a tax refund is not a gift from the government. It is your money and you can better use it!

So what will you do with your raise? Pay off debt, start a side hustle, take a vacation or save it for a rainy day! Let me know in the comments below.

Our popular Money Matters Wealth Tip the series can be found HERE.

Get A Pay Raise