Common Money Myths - Myth # 3
Myth: It's best to change your tax withholdings to '0' so you get a bigger paycheck.
By reducing your tax withholdings to “0” (setting allowances/exemptions to zero on your W-4), the most tax will actually be taken out of your paycheck. If you want to receive a “larger” paycheck in the short term, you should adjust your allowances to at least “1” or more. But, your tax obligations will still be there when April 15th rolls around. So, unless you’re saving these “extra” funds for when you do file your taxes, you could be in for a surprise with how much you may now owe to the IRS in addition to your state tax department.
Since taxes are usually paid over time through payroll deduction and spread throughout the year, you may now be facing a large bill if you wait until you file your tax return to pay what is due. Plus, this tax bill may need to be paid in one lump sum (this amount could be as high as a few thousand dollars or more). If you’re unable to make this payment, you may need to work-out a payment plan with the IRS. For example, someone who earns between $40,000 – under $50,000 per year, could be expected to pay $2,859 in taxes. According to The Motley Fool, “taxes are by far the single largest expense that most Americans pay every year.” And, the more you earn, the more you’re likely to owe each year.
In addition, if you haven’t paid enough taxes all year long, you could also be facing penalties and interest for underpaying your taxes. Ouch! Looks like you’ll be hit with a double whammy if you take too little out of each paycheck to have more money for yourself. Don’t do it!!
Information about income taxes was taken from Kiplinger’s –
https://www.kiplinger.com/article/business/t020-c006-s001-give-yourself-a-raise.html#:~:text=It%20all%20comes%20down%20to,the%20most%20tax%20taken%20out
Information about income taxes was taken from The Motley Fool - https://www.fool.com/taxes/how-much-does-the-average-american-pay-in-taxes/
Information about Common Money Myths was taken from a study recently conducted by Lending Tree - https://www.turnto23.com/lifestyle/over-90-of-americans-believe-in-at-least-one-money-myth
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