Taxes: How Much Should You Withhold?

by Stacy Francis, CFP®, CDFA

With only weeks to go before the arrival of my daughter, I go to a great deal of routine checkups. Fortunately, my doctor’s office is an efficient one, and I rarely have to wait for more than ten minutes. Yesterday, the other mother-to-be in the waiting room was quite chatty. Upon learning that I am a financial planner, she told me all about her savings strategy. She claims zero dependents even though she is the main breadwinner in her marriage and has a son. Consequently, every spring she receives a huge tax refund. She splits the money evenly between vacations and her savings account.

While it can be a major relief to receive a check rather than a bill from the IRS, her strategy has one drawback: in essence, she is granting the IRS an interest-free loan. If she would claim the correct number of dependents, she would keep a larger portion of her paycheck every month, and thus be able to invest the money earlier and start to make returns.

But before you slash your withholdings altogether to reverse the situation, so that you get an interest-free loan from the IRS, note that paying far too little taxes throughout the year can easily result in a $20,000 – or even a $50,000 – tax bill, enough to give the healthiest amongst us a stroke!

So what’s the golden number? Opt for the middle of the road, so that in the spring you get neither a terrifying bill nor a huge refund. That way, you safeguard yourself from financial panic and make the most out of your investment capital.

Should you file jointly or separate?

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Stacy Francis, CFP®, CDFA

Stacy Francis is the Founder, CEO and President of Francis Financial, Inc., a Wealth Management and Financial Planning firm. With over 18 years of experience in the financial industry, she is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Certified Divorce Financial Analyst™ (CDFA™), and a Certified Estate Planning Specialist (CES™). She is the Co-Director of the Association of Divorce Financial Planners’ (ADFP) Greater New York Metro Chapter and a member of the Women Presidents’ Organization (WPO) and an honoree member of the Private Risk Management Association (PRMA). A nationally recognized financial expert, Stacy has appeared on ABC News, CNBC, CNN, PBS Nightly Business Report, The Today Show, Good Morning America, Fine Living Network, and The O’Reilly Factor. Stacy attended the New York University Center for Finance, Law and Taxation.