Effects of Changing My Income Tax Withholding

I mentioned awhile back that I would be changing my income tax withholding. The tax refund that I got was pleasant for funding my emergency fund, but I am one of those folks that doesn't believe in giving Uncle Sam a free loan. My accountant naturally agrees with me. I told him that my ideal tax refund would be somewhere between $300 - $500. That would be enough to pay for his services while at the same time giving me a nice little buffer so I don't owe anything.

This year I got over $3,000 back! Again, while a windfall was certainly nice, I would much rather have the income over the course of the year so I can invest it or use it to pay my bills. The accountant pointed out that the refund I received was in part based on 6 months of home interest. (My ex. paid the mortgage from Jan. - June '08. That is when I took over.) This year I will be paying it all myself, meaning an even greater possibility for an even larger refund. Instead of allowing that to happen, he gave me some figures for calculating my deductions. I changed the deductions so that approximately $3,200 less would be taken out of my taxes. I realize that this may be low and I probably should have done more, but I feel comfortable with this as a starting off point. So, how much more does that mean in my paycheck....

$139.38 per paycheck - which means $278.76 a month!* It is quite a change, let me tell you.

So, does that mean I really need $621.24 a month? Well, yes. But then I have also found ways to trim that budget in savings, so it isn't quite $900 anymore. Talking to my insurance agent, for example, saved me $31.44 a month. That's another $30 trimmed off that $900 figure that I no longer have to get. So the question becomes, what do I need?

I think I am going to wait awhile to answer that question. In just a few months I will also have all my non secured debt paid off - no credit cards or car loans anymore. That too will effect my budget. June brings another milestone with it as well - it will be the one year anniversary of this blog! So, I think I am just going to let things ride as they are until then. As each paycheck comes in, I will add that extra amount to the sidebar, just like I do with income from my part time jobs. I'm going to take the next two months to work on a new budget for June 2009 -2010 that will include all of this and the changes that are coming up. I am also going to work on setting some new goals. I have my 2009 goals, and those are still valid, but I need to set more financial goals. Having this blog to help me focus has been so incredibly helpful and I want to keep that momentum going.

Here are things I will be thinking about and working on over the next two months:

- How much income exactly do I now need to bring in each month? Obviously, I need a new budget. On my old one I sort of tacked things on ad hoc. The new one should take into account all the things I have done since last June to trim my budget, plus what I have done to get extra monthly income, like changing my tax withholding.

- What are my short term goals? Of the 2009 goals that I set in December I had four financial ones for the year: Put aside one month of emergency savings, get my credit card paid off, get my auto loan paid off, get $900 a month. The tax return funded the emergency fund, so that goal is done. The car and the credit card will both be paid off in June or sooner. So, what do I work on from June 09 to June 10? I suspect it will have to do with more investments and...

- How much money do I need for home improvement projects? I have three big projects that are on the horizon - I need to have the house painted, my shed rebuilt and my bathroom remolded. The painting has to happen this year. The wood is starting to rot in places. The shed also has to happen, but it could be done a little later in the summer. I might even be able to stretch it to fall. The bathroom can be done at any time at all, as long as it is before I sell the house. So, it could wait years... but, the work is extensive and has to be done by a professional. I am fairly handy, but this would be getting into some areas beyond my expertise, I think. Starting to save up for that project now, as well as these other projects, is really important to me. I want to see how much of this I can do without going into debt. This means the first thing I need to do is start getting some quotes and start a home improvement fund.

- What about going back to school? Getting my Masters Degree is important to me, but I don't think it is something I can embark until I have sold my house and can eliminate a lot of my extra stress. Still, I want to spend time thinking about this and how I am going to pay for it.

- Finally, what are my long term goals? This is something I think about a lot. What are my goals for retirement and what would it take to make me feel financially secure? For example, I know I don't have nearly enough in my emergency fund. I'd like to spend some time thinking (and, of course, writing) about where I want to be in 5, 10 and 20 years. I have been so focused on living month to month; I'd like to also look ahead and see how the tools I have learned over the last 10 months can help me to move forward.

Of course, whatever I decide, however my budget turns out, whatever this blog becomes - I'll be writing about it here.

Tools

The IRS has a withholding calculator. You can find it here.



* I think the "Work Pays" Stimulus tax break is in there too. They happened at about the same time.

Fun photo of death and taxes by: aja joy