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  • Writer's pictureHarry N. Stout

55- Cash Tip: Manage Your Income Tax Withholdings

Updated: Jan 15, 2021

In 2017, Congress passed and the President signed into law tax reform legislation.

As a result of the new law, in early 2019 many people were surprised that their expected income tax refunds were lower than planned or to the chagrin of many – they owed taxes and needed to pay. Properly managing the timing of income tax payments can save you money, improve cash flow and help reduce outstanding debt faster.

Many people enjoy getting a tax refund check early each year and view it as windfall or as some form of forced savings. In some situations, individuals end up owing money and are subject to IRS penalties and interest for not paying what they should have – this is called under withholding of income taxes.

My view is that it would be a better outcome for most people to have increased or more accurate monthly cash flow by setting their withholdings at the proper amount. This should assure that you don’t have too much or too little withheld. By increasing monthly cash flow you will also create a source of funds to increase your emergency fund, pay down high interest debt faster, or increase planned savings.

Here are two posts I recently came across that provide much more information and details. For those of you who want to go directly to the source, the IRS issued a new Tax Withholding Estimator.

The first post appeared on CNN Politics, titled Avoid Tax Refund Surprises by Filling Out This New Form. The post discusses the just-released federal income tax withholding form and why it is a good idea to fill it out, even if you are not required to do so.

The second post is from the Kiplinger organization and appeared on Yahoo Finance. It is titled 10 Things Every Worker Needs to Know About the New W-4 Form for 2020. This post goes into great depth discusses the key aspects of withholding taxes and what you need to review and understand.

You can avoid paying unnecessary costs, possibly increase your cash flow, and avoid the unpleasant reality of needing to pay a balance due for income taxes by managing your withholdings. The good news is there are number of tools and resources to help you in this process.


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