Monday, March 19, 2012

TAXES: To withhold or not to withhold?

It’s tax time and when it comes to my taxes, I’m on the fence about how to adjust my withholding's.  Do I increase my allowances so that I get a nice fat check come March or do I do I decrease my allowances so that I break even at the end of the year?  I understand the arguments on both sides, yet with today’s savings rates, here I sit…on the fence.

If I claim Married 2 (as opposed to the Married 4 I claim now), I’ll be giving the government an interest free loan over the course of the year.  At what cost?  I would be giving the government extra $60 dollars a pay period and at current interest rates (0.84% available at Ally Bank) compounded daily, I would earn a grand total of $12.10 for the year. 

If I were to invest that $60 a month in a mutual fund, say one following the S&P 500 Index, last year I would have earned $0(I may have even lost money considering the big downturn in August!).  However, the same money, with a return of 8% would yield a $63.95 return.  A return of $12 makes me to want to lend it to the government so that come March and receive a large check.
The ever popular, and helpful,  pro/con list(or pro/pro list as the case is here):

Break even Pros:
  1. Bigger paycheck and therefore more monthly cash flow.
  2. Earn interest by saving on my own.

Big Refund Pros:
  1. Nice windfall once a year.
  2. Forced savings.
I think for the time being we’re going to try to get a big tax refund.  Since interest rates aren’t enticing me at all and we save 15% for retirement as it is, a nice little windfall to increase our emergency fund, pay down or mortgage, splurge a little or even all three is worth it right now.  If monthly cash flow seems to get tight and I can’t squeeze anything else out of the budget, I can always adjust my withholding's later.  

How do you manage your withholding's? 

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