Tax Withholdings

Unless you are a business owner or self employed, the government withholds expected taxes from your paycheck. If the government withholds money on your income and you consistently get a significant tax return, it means that they are withholding too much. Would you lend that money to a stranger for free? Essentially you are giving the Federal Government a 0% interest loan. What if you claimed tax exempt on your W4. Then you automatically put what the government normally withdrawals into an online savings account at 3% interest. Then even if you have to pay taxes at the end of the year, you have made 3% interest on the money during the year. Below is a comparison of the two ideas.

Income $ 100,000.00 Interest 3%

Month          Total            Savings           Interest
              Withholding
   1           $ 1,666.67      $ 1,666.67        $ 50.00
   2           $ 3,333.33      $ 3,383.33      $ 101.50
   3           $ 5,000.00      $ 5,151.50      $ 154.55
   4           $ 6,666.67      $ 6,972.71      $ 209.18
   5           $ 8,333.33      $ 8,848.56      $ 265.46
   6         $ 10,000.00     $ 10,780.68     $ 323.42
   7         $ 11,666.67     $ 12,770.77     $ 383.12
   8         $ 13,333.33     $ 14,820.56     $ 444.62
   9         $ 15,000.00     $ 16,931.84     $ 507.96
  10       $ 16,666.67     $ 19,106.47     $ 573.19
  11       $ 18,333.33     $ 21,346.33     $ 640.39
  12       $ 20,000.00     $ 23,653.38     $ 709.60
Taxes
Owed    $ 15,000.00     $15,000.00
Return       $5,000.00      $8,653.38

Difference $3,653.38

As you see above, the person that puts their withholdings in a savings account has just over $3,653 more than the person who gave the government a 0% loan. Keep in mind that this method takes a very disciplined individual because if you spend the money instead of saving it you may end up owing more taxes then you have money to pay for. Also keep in mind that you will receive Form 1099 from your bank account showing the interest you have made. Be sure this will not change your tax bracket. Most likely it will not, but if it is significant enough to do so you might want to consider doing something else. Keep in mind that I am not a CPA. You should always consult a tax profession when making tax decisions.