Please ensure Javascript is enabled for purposes of website accessibility

Need Money During COVID-19? Here's 1 Simple Way to Get the IRS to Give It to You.

By Maurie Backman - May 24, 2020 at 9:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One easy move on your part could increase your paychecks.

Millions of Americans are having a hard time making ends meet during the COVID-19 crisis. Some have seen their wages reduced, while others are incurring added expenses that are wreaking havoc on their budgets. If you're still collecting a paycheck but are having financial difficulties, you have several options for addressing that problem, like taking out a personal loan or borrowing from your retirement savings. But what if there were a way to get the IRS to just give you more money instead?

The benefit of adjusting your withholding

Workers rarely break exactly even when filing their tax returns. Most people wind up getting a refund from the IRS, while some end up owing money. The reason for this is that the tax you pay on your wages during that year is really just an estimate.

Tax Form W-4 being filled out

IMAGE SOURCE: GETTY IMAGES.

Each year, the IRS issues withholding tables that dictate how much tax employers should hold back from employees' wages. The more allowances you claim you on your W-4, the less tax you have withheld, and the more money you get in your paychecks up front. You can claim one allowance for yourself, plus an additional allowance for your spouse and each dependent you list on your tax return.

Some workers, however, claim fewer allowances on their W-4 than they're entitled to, whether due to fear of owing money to the IRS or due to a lack of knowledge about how those allowances work. But if you're having a hard time financially right now, and you typically get a refund from the IRS when you file your taxes, then it pays to look at your current withholding and see if any adjustments are necessary. Claiming an extra allowance you're entitled to could put more money back in your pocket when you need it the most.

Of course, that may beg the question: What if make that change, and as a result, your employer withholds too little tax? In that scenario, you're looking at potentially owing the IRS money when you file this year's taxes in 2021. But if that's a concern, what you can do is adjust your withholding, figure out exactly how much extra money that adds to each paycheck, and then put that additional cash into a dedicated savings account that you only touch if there's an immediate expense you need to pay for. That way, the money you don't use right away can earn interest for you (as opposed to you withholding more tax than needed and giving the government an interest-free loan), and if you wind up owing the IRS next year, you can dip into that account to cover your tax bill.

Don't delay earnings at a time like this

Having too much tax taken out of your paychecks is akin to delaying a portion of your earnings, and at a time like this, you probably can't afford to do that. If you're in the midst of a financial crunch, look at the W-4 your employer has on file for you and see if it pays to make a change. You're allowed to adjust your withholding during the year, though it may take a few pay cycles for changes to kick in, so the sooner you get moving, the better.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
323%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.