So I have recently been asked by my employer if I wanted to switch from claiming 0 to claiming 1 on my taxes. I am in my low 20's, single, no kids with a steady job that occasionally gets overtime. I am purchasing my first home (closing on June 12th ). I am putting in a brand new 93% efficient furnace right off the bat in the house.
In the past 2 years I have gotten a fairly large tax return. So would you suggest it be better to claim 1 and get more per pay check or not? If I change and claim 1 now, half way through the year will this cause issues when it comes tax time?
One thing to remember is that the withholding amounts were decreased recently without decreasing the tax rates. The idea is to get small amounts of money into everyone's hands and they don't recognize the increase and will spend more. This is supposed to give the economy a boost.
Just remember that if you get a refund, you have loaned the government that money interest free. If you have to pay when you file, the money has been an interest free loan to you. This is not the reality, but it gets the idea across.
If you are willing to accept the smaller tax refund, then do nothing. (bad idea)
Better is to take the increased funds in your paycheck and put it into something that gives you interest. You are already accustomed to getting a certain amount in your paycheck and the increase will not be missed if you put it into savings. If it is a good amount of money, the interest may prove to be well worth the effort of setting up an automatic transfer to your savings or money market account.
Thanks for the reply. I am trying to learn a bit more about taxes and personal finance so any suggestions are accepted.
Are you disciplined enough to take the few extra bucks a paycheck and ensure that you put it away rather than spending them on a few extra coffees and a book every week?
If so, then go for it, but there's something to be said for forced savings (which the tax refund is, but an inelegant means of doing so).
You're less likely to blow one big check on junk than 26 small ones or at least I am.
I seem to be good at holding on to money. I get about 20% of my paycheck automatically put in my savings every 2 weeks. Takes me a long time to make any decision on purchasing anything.
Thanks to not having any cash in my wallet any more I don't have to worry about spending extra on Mt Dew since pop machines don't take plastic!
In the past 2 1/2 yrs I have been able to put away $15,000 in bank CD's that is now my down payment for my house.
I have always claimed "0" deductions to avoid paying taxes later. Except for the years I've sold stock, this strategy has worked.
Then you would probably be ok getting the extra cash every week, just make sure that you increase your savings rate to compensate for the extra money.
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