Can a Change in W-4 Enable People to Make Ends Meet?

While the prices of food and energy continue to increase, the real value of wages tend to shrink after adding up the adjustments for inflation.  If you plan to stretch your budget, it would be easier to have less tax deducted from your weekly salary than getting a pay increase.

The Pros and Cons of Postponing Tax Payments

Withholding tax payments however could become a problem if you don’t have a bonus coming at year’s end to cover your owed taxes.  You will just postpone your financial pain.  

Another problem you might encounter is you could be hit with a penalty if you undershoot too far.  Regulations provide that you need to have enough withheld in order to cover 90 percent of taxes owed.  If you’re lucky and got a raise this year, then you will be better off especially if your withheld tax is 100 percent of what you owe the previous year.  

In other cases, if you get a tax refund then you could withhold paying taxes and still have plenty to cover your owed taxes come payment time in April.  

Steps to Withhold Taxes

To know these things, you need to get an IRS W-4 Form and fill out its worksheet asking for your itemized deductions.  You will have to fill in the specific amount for your qualified interest payments.

You need to be prepared for the IRS math as it uses some amount of voodoo economics in calculating withholding taxes.  There are instances when your final tax bill could overshoot or undershoot your tax withheld even after correctly filling out the worksheet for itemized deductions.

On the other hand, if you are receiving a regular paycheck, you can also calculate your entire earnings for the whole year then estimate what you will owe based on the tax tables.  Based on this formula, you can now adjust the amount to be withheld.

This method could be a bit risky as the tax table for 2008 would be different.  However, if your salary and current deductions did not change much, then you will be a little safer.

Money Management Schemes

Another question is related to personal budgeting.  Queries have been made on what pie chart will show everyday expenses percentages allowing for retirement savings?

Budgeting is a big word that can help control your daily expenses.  The first step in effective budgeting is to determine where your finances are going.  For example, you can try to cut the amount of money you withdraw from the ATM each payday.  This could be your personal money management style.  If you want to have a clear record of where your money is going, then using a credit could help.

You can also make a detailed record of your spending.  Put them on a logbook and categorize each expense groups.  Most people are still surprised by the disparity of their spending habits and their actual budgets.