We all lead busy lives, but there’s a quick way to assess whether you’re taking advantage of some of the perks offered by your employer and the federal tax code: Monitor your paycheck stub closely.
According to Andrea Coombes with MarketWatch, paying close enough to your paycheck stub can give you valuable insight into how you can tweak personal finances.
Match the government
There’s not much you can do to change the portion of your income you must pay to FICA taxes for Social Security and Medicare, but Gerri Detweiler, a Sarasota, Fla.-based credit adviser with Credit.com, says it’s important to pay attention to those amounts anyway.
“You might be surprised at how much you’re forking over for that each month,” Detweiler told MarketWatch. “The lesson is you’re used to turning over about 7.5% of your paycheck each pay period to the government and you don’t think twice about it. Are you doing the same for your own retirement savings?”
Detweiler says to try to at least match that figure, and ideally exceed it, with contributions to your own retirement accounts. Not only will you be better for it come retirement day, but contributing to a 401(k) or similar plan will reduce your income subject to taxes this year.
What’s missing?
Think about what isn’t on your paycheck stub, and if you’re not sure ask your company if there are any other deductions or employee benefits that are available through the company. Sheryl Garrett, founder of the investment advisory service Garrett Planning Network says it’s important to find out about benefits that let you stash pretax income in a separate account, or even perks that make it easier to control after-tax money. For example, your employer may allow your pay to be directly deposited into more than one account, providing a quick, painless way to push more dollars into a savings account, MarketWatch says.
Other options include flexible-spending accounts for medical or dependent-care expenses. Figure out your effective tax rate (the discount you get off medical expenses when you pay with pretax dollars) by looking at your 2007 tax return. MarketWatch says to plan carefully by lowballing your expected expenses in the year ahead, since medical-flexible-spending funds are “use it or lose it.”
Withholding
Did you get a big refund or owe a big tax bill? Now’s the time to adjust the amount of taxes withheld from your paycheck. MarketWatch recommends you get your tax bill or refund as close as possible to zero come April 15 or at least within a few hundred dollars. Having the wrong amount withheld from your paycheck can lead to costly personal-finance mistakes. At tax time, “too often people don’t have that money and they have to dip into an account or a credit card to pay their taxes. It’s better if we just paid it along the way,” Garrett said.
It’s also not recommended you don’t receive big refunds every year—rather use the extra money throughout the year to pay down debt or put the money into a Roth. Leaving it with the IRS is never a good idea, Garrett recommends.
Major life changes are another reason to adjust one’s withholding. Getting married or buying a home changes your personal status and that can affect your taxes.
Be sure to adjust the number of exemptions you claim on your W-4, the form your employer uses to figure your withholding. The more exemptions you claim, the less money is taken from your paycheck; that is, the less tax is withheld. If you claim zero, you pay the maximum possible in taxes via your paycheck. To figure out how many allowances to claim, MarketWatch suggests the IRS withholding calculator at http://www.irs.gov.
Check for errors
Watch for errors on your paycheck by looking at it periodically. Simple errors can cost you a lot of money, since the information from your paycheck feeds your W-2 and in turn feeds your tax filing, MarketWatch says.
