Hi Sally. I heard you on Marc Pearlman's show and now I'm reading your book. I am a single woman of 45 who has always lived paycheck to paycheck. I have no savings, $7000 in credit card debt, and about $20,000 in an IRA (which I know is very little for my age, but I've had problems keeping jobs). I rent, don't own a car, and my immediate goal right now is to get out of debt, become a saver, and change my lifestyle of always being broke. (Thinking of buying a home or condo is a distant dream right now.)
I started a full-time job 2 months ago and I make $65,000 a year before taxes. Here's my question: I wonder if I should have my W-4 adjusted so that I have less money withheld from my paychecks and can pay my debt off faster? I've already done my 2007 taxes and got a $2,600 refund. I think the refund was so high because I only worked half the year (June to December).
Right now I only take one allowance. I tried to use the IRS withholding calculator on their site, but the link is unavailable temporarily, and it looks like I can’t have more than one allowance because I’m not married, haven’t bought a house, have no kids, etc. Thanks for the information and the great advice! I am going to use your budget sheets. By the way, from your picture on the site, you don't look old enough for your daughter to be 20! Thanks and best wishes. Cynthia, Chicago, IL
Cynthia - Thanks for the compliment! I am in my 40s, too. It sneaks up on us!
You're right - the IRS withholding calculator is down. Kiplinger has a withholding calculator, but it doesn't account for major changes, such as working 12 months this year and only 6 last year. Without taking that into account, you could get a false result and wind up with a big tax liability next year.
You can estimate your tax liability for 2008 by using 2007 tax forms or tax software and your 2008 wages, or you can go to http://www.taxcut.com/tax_tips/index.html and use the TaxCut tax estimator. If you use the TaxCut estimator, enter the amount you expect to make this year and enter taxes withheld as $0 (zero). The estimator will tell you how much tax you owe for the year before withholding. I got $10,486 using your numbers. If you get paid twice a month, that's $437 per paycheck you need to have withheld to avoid paying tax next April ($10,486 divided by 24 pay periods). If your paystub says you are having more withheld, try adding one or two withholding exemptions.
You can change your withholding again at any time. Keeping a good eye on your tax withholding is one of the smartest things you can do to get your financial life in order. Good luck!
Sally