Finance

Tax Withholding vs. Savings

Many taxpayers use tax withholding as a means to save up for money. This isn’t a good deal at all. It isn’t a wide approach to treat taxes withheld as savings. Since you’re loaning your money to the government for free, you won’t get anything in return than what you paid the IRS.

Although withholding more tax than you owe is going to be refunded to you in your tax refund, there are better ways to get more out of your money. First and foremost, you should withhold tax at a rate where it is slightly higher than what you’re going to owe the IRS. Instead of forwarding money to the IRS as a means to save money, put the extra amount in a savings account.

By doing this, you will earn interest. Even though the interest earned from a savings account is taxable, you will get to keep at least 65% of the earned interest. This—of course—for those who are at the highest tax bracket.

Assume your tax rate is 22%. This would mean you get to keep at least 78% of the interest earned. Having said that, instead of forwarding more money to the IRS than needed, open up a savings account and start earning interest.

Learn more about savings accounts.

How to withhold tax at the right rate?

There are a few variables when it comes to withholding tax. An employer will withhold tax by looking at the information provided on the employee’s Form W-4. This will give enough data to the employer to compare it with the federal tax withholding tables. The employer can figure out the right withholding amount in multiple ways by following the guides on the tax withholding tables.

All employees should file Form W-4 to provide the necessary information to their employer. It also should be provided with the most correct information. There are ways to see if you’re unsure about how much tax is withheld. The Internal Revenue Service provides taxpayers with the tax withholding estimator. This tool helps you see how much tax is going to be withheld during the course of the tax year. On the tax withholding estimator, you will provide certain information based on your:

  • Income
  • Filing Status
  • Multiple Jobs
  • Anticipated Deductions
  • Anticipated Tax Credits

These will give you an estimate of the total amount of tax withheld. We suggest answering the tax withholding estimator’s questions with the same provided on your Form W-4. You will surely have a much more accurate estimate this way.

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