Key Triggers: It May Be Time To Adjust Your Withholding

Withholdings – You Can’t Just Set and Forget!

Every employee must fill out what is known as a W-4 form, which tells the employer the amount of tax to withhold from an employee’s paycheck.  The form is based off of allowances, which are based on the IRS look up tables and used to figure out how much tax to withhold.  Basically the formula is total tax deduction divided by personal exemption amount (acts like a tax deduction because it reduces your taxable income).

As you focus your energy on calculating the amount of tax you either do or don’t owe, the primary area you will be concentrating on is that of withholding. You will be asked to report on marital status, allowances you qualify for, and any extra withholdings to report. 

There are key triggers that typically lead to withholding changes you should know:

• Change in income
• Change in household situation
  *Marriage – your household withholdings could go up or down depending upon whether your spouse is bringing in any income.
  *Divorce – your household income is affected and alimony is factored in.  Whether you are on the  paying or receiving end, there are specific forms to fill out relating to alimony.  Note…if you are on  the receiving end, you will be paying tax on it.

• Birth of children (equals new allowances, which reduce withholding)

A good practice to get into is to have a tax projection run every year to see where you stand from a tax standpoint.  You can project your income and deductions based on what you expect for the upcoming tax year, and then use the tax rates for the corresponding year to predict what your tax will be.  The last thing you want is to be surprised with a huge tax bill!!!!  After that, you can go to the IRS web site to check your allowances using their online calculator.

It is easy to forget to check your withholding every year, but a large tax bill is a painful reminder you could have avoided if you would have taken 30 minutes out of your day to do the math. 

Signs Your Financial Lifestyle Needs To Change

Are You Living Beyond Your Wallet?

According to the Consumer Reports Index, which measures American’s financial health, middle income families experiencing financial struggles rose during the month of January.  This comes as no surprise, as a large part of society has become extremely reliant on credit cards and loans for just about everything.  Despite the recession and depressed values in real estate, many are still chanting “consumption is king,” rather than “cash or saving is king.” 

Our tendency to compare ourselves to others does not help (keeping up with the Jones’ mentality), nor does the avoidance of altering a lifestyle one has become accustomed to (something many suffer from). 

So how do you know if you are living beyond your wallet, and what can you do about it?

• Emergency Fund is non – existent

You have not been able to put away a satisfactory amount to float you through times of trouble such as a lay off, medical emergency, or other unexpected large expense. It is ideal to have 3-6 months worth of expenses set aside to cover this need.

• You are robbing Peter to pay Paul

You find yourself delaying making payment to pay another vendor first because you don’t have enough funds to pay both bills on time

• Your credit score is below 600

Scores can range all the way up to 850.  Missed or late payments, outstanding judgments, total debt ratio, and too many credit cards can all add to this score being low, which will hinder your ability to get good financing rates or any loans at all.

• You exceed your credit limit

A red flag should be going up if you are using 50% or more of the credit available on your credit card, and unable to pay your outstanding balance down on monthly basis.  If you compare your credit card balance from year to year and notice you there has not been much change, there is more than likely an issue that should be addressed.

• Overdraft Fees continue to hit your account

Fees are incurred when money is withdrawn from the account via check processing, etc… and there is not enough in the account to cover it.

Overdraft protection is put in place to cover you when there is not enough money in your account.  It is a checking account feature offering a line of credit to write checks for more than the actual account balance.  While this may help you ward off overdraft fees, it can also be viewed as enabling you to continue to use money you don’t have.

• 35% or more of you income is going into your home via mortgage or rent payments, maintenance, etc…

Be careful not to bite off more than you can chew. What good is a big house if you can’t afford to eat or pay your utilities?

• Inability to save 10% of your pay to put towards retirement

This is one of those general rules of thumb figures.  The point is that you should not be living a lifestyle where you are unable to put money away for your retirement every year. 

Now what can you do about it?

• Create a budget, and while doing so cut back in any areas you can such as dining out, “extras such as caller id” with regard to your phone bill, making coffee at home rather than visiting the local Starbucks, clipping coupons to save on groceries, etc… Also look for ways to save in areas such as water and energy.
• Payoff any outstanding judgements
• Pay down your debt.  If you can’t do it on your own, look into other alternatives such as debt relief plans.  One resource is www.careonecredit.com.
• Limit credit card use and use fewer credit cards. 
• Look into whether refinancing your home or auto loan makes sense
• Stop focusing on the size of your house and focus on the quality of your life and ability to save.  Understand this may mean moving to a more affordable home.
• After your paycheck hits, pay your bills first and then pay yourself!  Take necessary steps to ensure saving such as setting up automatic transfers to your savings account, which can then be used to grow your emergency fund and/or retirement account

Visit our blog post entitled, “Simple Money Saving and Financial Planning Tips for 2013”