Inflation has got everyone thinking about expenses lately, but what about your income? Did you know that how much you get paid is under your control more than you think? The reason? Taxes. Your stated salary is only one factor that determines your take home pay. You can increase and decrease your take home pay simply by making some of these adjustments. It’s worth exploring what might work for you.
Adjust Your W-4 Withholdings
Do you always get a tax refund? That means you’re probably getting paid too little each month in take home pay. You can make adjustments to through payroll that will have the effect of giving you a raise. It means you will not get as much of a refund later when you file taxes, but it’s usually better to have more money month-to-month than to have to wait a full year to get it back.
If you find yourself needing additional cash in your monthly take home pay, then I suggested contacting HR or logging into your HR portal to fill out a new W-4 form. Before you start that process — I suggest going to a handy calculator offered by the IRS.
You’ll need to have a copy of your most recent paystub handy as well as last year’s tax return. Be prepared to take 30 minutes to an hour to review these calculator carefully. Each step has a “tool tip” to help you through the process. It can get more confusing if you or your spouse had multiple jobs or other streams of income. However, at the end of it you may find that you can get between $100-150 more in take home pay each pay period as a result. This is because the average tax refund received in 2022 was $3,536 according to IRS data.
The IRS tool will even pre-fill the recommended changes onto a W-4 form to make it easy to send into your HR department if yours doesn’t use an automated portal. Your state will have a different form and different rules, so you’ll want to review those carefully. The goal here is to pay enough in taxes to cover your tax bill instead of waiting on a large refund.
>>>>Best practice: Whenever you have a pay increase, life change (birth, move, death, divorce, etc.), or get a new source of income (bonus, investment, stock option, RSU, etc.) you will need to update your W-4. Regardless, it’s a good practice to review your withholdings at least annually. This is not a “set it and forget it,” recommendation.
Adjust Your Retirement Contributions
Another way great way to give yourself a raise is by increasing your retirement contribution at work. Every dollar you save toward a traditional retirement plan (such as a 401k or 403b) gives you a tax deduction. Considering average federal and state income taxes, you could be getting a 20-30% discount on your retirement contributions. For instance, for each hundred dollars you contribute to a retirement fund, you would only be paying $70 to $80 to make that contribution because of the tax deduction. These tax savings can add up to thousands each year. That’s money in today’s pocket as well as money for your future self.
Plus you get the added benefit of compounding those savings over time leading up to retirement. You have to save less the earlier you start boosting your savings. For instance, $1 you save in your 20s will be worth ~$15 dollars at a typical retirement age (65), while dollars you save in your 40s will only be worth ~$4 each by age 65.
>>>>Best practice: For 2022, the IRS increased the maximum 401(k), TSP, and 403(b) contribution to $20,500. Try to get as close to maxing out as you can. But if you’re not there yet — Start where you are today and split half your future raise with your retirement. For example, if you get a 6% raise, increase your retirement contribution by 3% this year.
Adjust Your Benefits
Have you ever noticed that your take home pay changes when you elect new benefits? You can get big tax deductions for health care and other cafeteria plans like FSAs (flexible spending accounts) or HSAs (Health Savings Accounts). It pays to take some time during open enrollment to review your options instead of going with what you chose last year. Do you find that you have recurring healthcare expenses that aren’t covered by health insurance? Then it’s time to elect one of the special savings accounts offered by your employer.
An FSA or HSA is a way to prepay for these expenses and get a tax deduction on them (think of it like a 20-30% discount on health expenses). The main difference between the two accounts is that an FSA is a “use-it-or-lose-it” account — so it’s a good idea to carefully estimate how much your health care expenses will be. The HSA account stays with you even when you change jobs and can even become a source of income (for health care related expenses) in retirement! You do have to be enrolled in a special type of high-deductible health care plan (HDHP) in order to qualify for an HSA.
Lots of things besides copays or medicine can be paid for with an FSA or HSA which you might not expect. They include menstrual products, pregnancy tests, condoms, sunscreen, heating pads, and home first aid. It shouldn’t be hard to max out these accounts and watch your tax savings have the effect of increasing money available to you for these purposes.
>>>Best practice: For 2022, the maximum FSA contribution is $2,850 and the maximum HSA contribution is $3,650 (but keep in mind your contribution is reduced by anything your employer might kick in). Get as close to the maximum as you can, but remember don’t over-contribute to an FSA since you will lose any unspent money after a year. Tax savings for the year could range between $500 and $1,000 — that’s real money in your pocket!
These are three great ways to consider that could provide extra dollars in your pocket each month without ever having to ask your boss for permission. It’s a good idea to review these three things at least annually — perhaps in conjunction with your open enrollment period.
What do you think? Have you ever tried to adjust your take home pay through any of these methods?
