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Fiscal Fitness: Give Yourself a $200 Raise Right Now

By Dayana Yochim



The Motley Fool’s Fiscal Fitness Boot Camp is in session! Every weekday this month, we’ll walk you through a fresh money-saving/money-making tip as we work toward finding $2,000 in savings you didn’t know you had.


Do you like lending money to the IRS? The answer is yes for three-quarters of taxpayers.

Every year, about 75% of us overpay our taxes. By quite a lot. In fact, the average tax refund last year was around $2,400, which amounts to $200 a month lining Uncle Sam's pockets until he pays it back to you ... without interest.

If you hit the refund jackpot last April (or already know that you're getting a refund this year), then it's time to give yourself a raise, starting with your next paycheck.

What's wrong with getting a refund?
I know it's hard to beat the thrill of a windfall, but consider what you're passing up by giving Uncle Sam an interest-free loan for roughly six months (on average). If the IRS were paying out measly checking-account rates of around 0.5%, you'd be able to pick up the tab for a few espressos -- or $6. Even if you could earn 2% from a high-yield savings account , it'd amount to just $24.

Nonplussed? I hear ya. For those who are tempted to skip this step and instead rely on over-withholding as an enforced savings plan, allow me to convince you otherwise.

Think about where else you could get a better return than 0%. Perhaps you have outstanding credit card debt? Or maybe you have $0 in your emergency savings account.

The point is, you could have $200 extra each month to pay off your debt (use our " Get Out of Debt " guide to wipe it out) or pad your emergency savings ( more on that here ).

Pad your paycheck with an extra $200 a month
Let's get to the details so you can start seeing the fruits of today's Fiscal Fitness tip ASAP.

To complete this task, you'll need:

* Your most recent pay stub
* Last year's income tax return
* A fresh Form W-4 from your employer, or download one from the IRS website

The idea here is to increase the number of exemptions you take while avoiding underpaying. To nail the number, use the IRS' withholding calculator . The Form W-4 Assistant calculator at PaycheckCity can also help you.

How much is each exemption worth? Well, generalizations and taxes are a potentially lethal cocktail, but if you thrive on rules-of-thumb, figure that each exemption equals about $850 in tax.

Avoid Uncle Sam's ire
To avoid underpayment penalties, shoot for the number of allowances that satisfies 100% to 110% of the prior year's tax payment (not counting your refund). Don't worry about nailing your withholding perfectly. Put a reminder in your date book in June, when you'll have a better handle on how your annual wages and withholdings will shake out. (Here's more on how the IRS handles underpayments .)

One more note before you fill out a fresh W-4: This exercise is best for those who do not anticipate any major life/tax changes (e.g., marriage, birth, Lotto payout) and have a predictably consistent income. So if this year looks like it'll be a pretty close repeat of last year, go snag that $200 monthly raise right now.

More ways to save ...
Don't fritter away the extra money: Just because your paycheck is a bit fatter doesn't mean you have extra money to spend. Nope -- this tip is all about putting the money you earned to better use. So if you're going to be tempted to blow the dough, have it diverted automatically to a separate savings or investment account. Out of sight, out of mind, and off to better use!

Get organized and snag all those deductions/credits you deserve: Everyone gets a standard deduction, but that doesn't mean you should take it. Millions of people give up potential tax savings simply because they don't keep records or take the time to itemize their deductions. Especially for homeowners and those with high medical bills, missing out on itemized deductions is hazardous for your financial health. And if you do go with the standard deduction, don't just assume that you should take it on both your state and federal returns, or you could be leaving money on the table. Try this simple three-folder tax record-keeping system . What better time to put it in place than now, at the beginning of the year?

Get financially fit with The Motley Fool!:
1. Start out with our 13 Steps to Investing Foolishly
2. Join us on Facebook
3. Check out Fool.com


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Comment by TheArtiste Hassan on January 20, 2010 at 7:26pm
Thanks Sid,... very interesting.

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