Millions of Americans are having a hard time making ends meet during the COVID-19 crisis. Some have seen their wages reduced, while others are incurring added expenses that are wreaking havoc on their budgets. If you're still collecting a paycheck but are having financial difficulties, you have several options for addressing that problem, like taking out a personal loan or borrowing from your retirement savings. But what if there were a way to get the IRS to just give you more money instead?
The benefit of adjusting your withholding
Workers rarely break exactly even when filing their tax returns. Most people wind up getting a refund from the IRS, while some end up owing money. The reason for this is that the tax you pay on your wages during that year is really just an estimate.
Each year, the IRS issues withholding tables that dictate how much tax employers should hold back from employees' wages. The more allowances you claim you on your W-4, the less tax you have withheld, and the more money you get in your paychecks up front. You can claim one allowance for yourself, plus an additional allowance for your spouse and each dependent you list on your tax return.
Some workers, however, claim fewer allowances on their W-4 than they're entitled to, whether due to fear of owing money to the IRS or due to a lack of knowledge about how those allowances work. But if you're having a hard time financially right now, and you typically get a refund from the IRS when you file your taxes, then it pays to look at your current withholding and see if any adjustments are necessary. Claiming an extra allowance you're entitled to could put more money back in your pocket when you need it the most.
Of course, that may beg the question: What if make that change, and as a result, your employer withholds too little tax? In that scenario, you're looking at potentially owing the IRS money when you file this year's taxes in 2021. But if that's a concern, what you can do is adjust your withholding, figure out exactly how much extra money that adds to each paycheck, and then put that additional cash into a dedicated savings account that you only touch if there's an immediate expense you need to pay for. That way, the money you don't use right away can earn interest for you (as opposed to you withholding more tax than needed and giving the government an interest-free loan), and if you wind up owing the IRS next year, you can dip into that account to cover your tax bill.
Don't delay earnings at a time like this
Having too much tax taken out of your paychecks is akin to delaying a portion of your earnings, and at a time like this, you probably can't afford to do that. If you're in the midst of a financial crunch, look at the W-4 your employer has on file for you and see if it pays to make a change. You're allowed to adjust your withholding during the year, though it may take a few pay cycles for changes to kick in, so the sooner you get moving, the better.
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