Tuesday, January 6, 2009

Advice to Junior Officers: Tax Withholding

A few things came to mind that I thought were worth mentioning for the junior officers that read my blog. As I was writing, this started turning into a really long post, so I broke it up into three parts. Hindsight/Afterthought: This first part is actually applicable to just about anybody, not just junior officers.

Part 1. Tax Withholding.

It's a new year, so you may want to take a quick look at your tax withholding status, especially for those of you who...
  • bought a house
  • sold a house
  • got married
  • had a baby
Back when I was a newly-commissioned Ensign, someone taught me the basics of setting up your tax withholdings. Your objective should be to neither owe taxes nor get a big refund from the government at the end of the year. I know a lot of people like to set it up so they get a big tax refund at the end of the year like some sort of annual "bonus" (initially, I fell into that category as a young ensign).

Here's the thing though. If you are having too much money taken out of your paycheck each month and then getting paid back a bunch of it at the end of the year, you are in essence giving the government an interest-free loan. Now, maybe you find some nobility in helping fund the billion dollar bail-outs of the banking and auto industries, but you're financially better off if you have just the right amount of taxes withheld each month. The extra money that was going to the government could be going into your savings account and earning interest for YOU. ...OR!!! It could be going to paying for a babysitter and a nice dinner for you and your spouse to have a date without the kids each month.

When we lived here in Ashburn before, we were married with two kids and a mortgage, and I had my withholdings set to the maximum (10 on the MyPay website), and we still got a few hundred dollars of a tax return at the end of the year.

While we were in Hawaii living in Navy housing (so no mortgage), I turned our withholdings down to 4 because I expected to pay more taxes.

Now that we're back in Ashburn in a very similar situation as our last tour here, I cranked our withholdings back up to 10.

How do you know how many withholdings to claim? You can use this calculator at the IRS website.

How do you change your tax withholdings? For military service members, go to the MyPay website. After you log in, select "Federal Withholding" from the main menu under "Taxes."

Note this page also has a link to the IRS withholding calculator. At the bottom of the page, you can change your number of exemptions.

Don't forget to click "Save" before you click away elsewhere from that web page.

I periodically get emails from junior officers and midshipmen asking for advice on stuff. If you have a question, please feel free to email me. I might not know the answer, but hopefully I'll at least be able to point you in the right direction where to find the answer.


reddog said...

I always try to owe them as much money as possible. That way they are giving me a tax free loan.

We always have to pay quarterly but I make the payments as small as my tax accountant thinks I can get away with and not get a major audit. I'd rather invest the money and pay the government later.

If I lose all their money they will cut me a deal and let me pay less than I owe. That's always a good deal, although so far I've always been in the black at the end of the year.

J120 Bowman said...

Great advice for everyone! I figured this out about three years after leaving the Navy. I was claiming M-5 because there were five people in my family right? Wrong! By trial and error I ended up at M-12 and still received a couple hundred dollars back. The sad sobering part of this? I increased my take home pay more that year by doing this, than the 3.6% pay raise I received. That tells you how much money you are just giving Uncle Sam as a free loan. Take that money and invest it every month!

beebs said...

This is good advice. I hope everyone reading follows it.

I try to give them as little as possible.