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Most American workers can give themselves a tax cut much larger than the one being delivered by the Making Work Pay tax credit okayed by Congress earlier that year. That credit, a key part of President Obama’s economic stimulus plan, is worth $400 for individual workers and $800 for married couples. The potential do-it-yourself tax cut averages $2,700.
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The new credit won’t show up on tax returns until next spring, but workers are enjoying the benefit right now in the form of reduced tax withholding from their paychecks. Most single workers saw withholding drop -- and paychecks rise -- by about $45 a month starting in March or April. For married employees, the boost is about $65 a month. Read more about how the stimulus works.
This story shows you how to get more!
Here's a happy little secret: Most taxpayers have the power to boost their paychecks ... without working a minute of overtime or getting a promotion. You’re in the lucky group if you're one of the 75% of Americans who get a tax refund year after year. In 2008, the IRS issued nearly 107 million refunds averaging $2,400. So far this year, the average refund is even more: $2,700.
If you're just "average," then, you deserve an extra $225 a month in your paychecks -- far more than is being delivered by the stimulus plan. Habitual refund receivers have every right -- and some might say a patriotic duty to help stimulate the economy -- to order the IRS to take less out of their paychecks.
All you have to do is file a new W-4 form, Employee's Withholding Allowance Certificate, with your employer to adjust the number of "allowances" you claim. You get one allowance for yourself, your spouse and each of your dependents, for example, and maybe extra ones if you itemize or claim certain tax credits.
Each allowance for 2009 basically makes $3,650 of your annual income off-limits for income-tax withholding. Claiming extra allowances on your W-4 will automatically decrease withholding and increase your take-home pay. You'll enjoy instant gratification from a do-it-yourself pay raise.
To give you an idea of how much you stand to gain, we’ve updated Kiplinger's quick 'n' easy withholding calculator. Full disclosure: Reducing or eliminating over-withholding will reduce or eliminate the tax refund you’ll get next spring. But, face it: It makes a lot more sense to get your money when you earn it, particularly in these tough economic times. And, if President Obama and the Congress think reduced withholding is a key to the national economic recovery, the least you can do is give them a hand.
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