Calculate Your Estimated Tax for 2014

Most of you should have received your last pay-stub for the year by now.  My coworker sent me this link from the IRS website that you can use to estimate the amount of taxes you overpaid/underpaid in 2014.  A lot of the information you need for the calculator is on your last pay-stub so have it handy!

The goal is to get as close to zero as possible (no taxes owed or due).  A lot of people get excited when they get a large tax refund.  But that excitement is actually misplaced because when you overpay in taxes, you’ve given the government an interest free loan.  In other words, the government got to borrow your money for free.  If you had put that extra money in a CD at your local bank, the bank would have at least paid you interest when they gave you your money back, even if it is only 1%.  And if you had put that extra money in an IRA or 401k, you could have taken advantage of compounding interest and probably would have gotten an even higher return, much much higher (the S&P is up 8.5% YTD as of 12-17-14).

Of course, you also don’t want to withhold too little and end up owing a lot in taxes come April.  At best, it’ll take a chunk out of your savings account.  At worse, you won’t have the money set aside to pay for it.  Then you’re really in trouble.

Breaking perfectly even in the amount taxes owed/due is nearly impossible, so just try to keep the difference less than a few hundred dollars.  Using the calculator linked above helps a lot.  Of course you could also talk to a CPA to get even more accurate estimates.  If you see that the amount owed/due is over a couple hundred dollars, talk to your HR department about adjusting your withholding accordingly.

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