It can always be a struggle for Americans to try to decipher the tax law every year to try to figure out how much we owe to pay our way without losing any of the reasonable deductions we are allowed to take.
That uneasy wondering year to year is like trying to define and predict random vibrations on a spider web: You can guess, but you really can’t know unless you’re the spider who spun the web. Every year the IRS changes a little something and their entire web moves in a different way in waves of reaction and adjustment that the rest of us have to figure out.
One way to navigate the spider reverberations is to hire a professional. Our tax guy told me something interesting the other day that I will share with you — for free! — right now.
We always struggle trying to figure out each year how many withholdings we should take so we don’t owe in April. We were born in the Midwest, and we were raised with the philosophy that the U.S. Government should not be your savings bank during the year, so don’t overpay the IRS just to get a refund in April. We were taught to wisely figure out what we owe and pay that, and nothing more, and then when April arrives, we don’t owe anything and we don’t get anything back. We want our anticipated tax burden to be as close to zero as possible.
Now, that’s a great philosophy in theory, but in the real world practice of ever-changing vibrations in the tax spider web, we always have to adjust our expectations and our plan every year. That can be taxing in a non-monetary, but emotional, way. The simplest solution is to just lower your withholding across all our jobs and then you know you won’t owe anything in April and you might just even maybe get something back — but the Midwesterner in us wants to strike a more predictable, fair balance of neutral zero.
We asked our tax guy if we should lower withholding or if we should raise our Deferred Compensation contribution. Deferred Compensation is a neat program that allows us to invest our pre-tax money without having to pay any taxes on it until we actually start taking money out of that fund.
Our tax guy replied to that question with this sage advice: “Don’t do two things and expect one result.” That is a terrific warning across the entire body of our lives, but it was especially helpful in trying to figure out what to do for next year’s tax season. Don’t guess. Do one thing. See the result. Then do a second adjustment if you need it. Don’t do two things — lower withholding and increase Deferred Compensation contributions — and expect to figure out which one worked best.
We’ll start with lowering our withholding and go from there: Do one; Evaluate twice.
Great advice, David!
I have been told that it is most wise to set aside money in an interest bearing account and then use that for paying taxes, if there are any to be paid — beats giving it to the government in advance, who will most certainly not give you interest on your money given months in advance.
That makes a lot of sense, too, Gordon. Let your money work for you during the year, and then if you owe money, you pay, but you also get to keep the bit of profit earned on that money. You’d have to do that wisely, though, because you can’t owe too much in April or it starts to get complicated with quarterly payments and such, but the advice is sound in its founding.