Friday, March 07, 2008

Don't get in the habit of giving interest-free loans, update your W-4

Just finalizing my family's 2007 Federal and State tax returns using my TurboTax software, I realized I was due a refund, accepting the fact that I lost the opportunity to collect interest throughout the year on my overpayment. If you find yourself collecting a refund this year, take the time and analyze your W-4. To complete this analysis, you should be prepared to forecast your salary and the deductions that you expect in the coming year, most tax software packages have this featured built in….By updating your W-4, you will create additional savings $'s depending on the amount. I would open a new savings account to help you manage this process, prefer to use the ING Direct account.

Here are some calculations that show you how much you savings you can create:

- Assumes deposit at the end of the month, to link with your pay cycle
- Interest is earned at the end of the month, using 4% per annum
- Pay your tax bill at the end of March in the following year

For a refund of $1,200, you will earn $35
For a refund of $2,400, you will earn $69
For a refund of $3,600, you will earn $104

Here is a copy of my calculations

Another small step to your future financial success and take the few minutes to update your W-4.

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