January Paycheck Tune-up

Back in January it became clear to me that I needed to up my 401(k) contribution to allow for the new maximum and adjust my federal witholding so that I'd have more cash in my paycheck each month instead of a huge refund at the end of the year.

Maximize my 401(k) contribution
For the year 2004, the contribution limit was $13,000 and I get paid twice a month. So my payroll deduction was set for $542. Now that the limit is $14,000 I upped it to $584 (before my first pay period on 1/15). And I entered a reminder on my calendar for Jan 2, 2006 - to increase that deduction to $625. Hopefully by that point that amount will not seem like it will pinch.

Update my federal withholding allowances
As much as I enjoy the thrill of a huge tax return, I hate the thought of giving the government an interest free loan while I carry credit card debt even more. Even before I entered my non-cash charitable donations into my tax software I could see the feds owed me big. This was not a good sign. Because I own a home, and I had recently refinanced, I had a large amount of itemized deductions...not all of which had been accounted for when predicting my 2004 witholding allowances (or did I only do that when I got the job in 9/2003? sigh).

I've always used the IRS's withholding calculator but I did recently see that there are several more out there (H&R Block for one, but the TurboTax one wasn't even available for 2004 let alone 2005). Also, I think most tax software has this type of feature under "planning".

Before starting, it's helpful to gather what you paid last year in taxes so I had my 2004 YTD state taxes from my 12/31 paystub and I estimated my total year of property tax will be four times the single quarter payment included on a recent mortgage statement. The hardest part for me is knowing what I will pay in mortgage interest for the new year.

Any amortization table that helps you do the math for each year of interest will work, but I used a calculator at Bankrate.com to locate each of the 12 amounts of interest I'd pay in 2005. This year I didn't actually add them up - I just ballparked it based on what I saw - but next year I'm going to take the time to do the actual math. I calculated my new withholding allowance and submitted a new W-4 (PDF) form to my employer.

With my first paycheck of the year, I noted an increase of about $500 a month in my take-home pay. In January and February it's gone straight to the credit card debt and I don't even miss it. I e-filed my taxes on 2/15 and eagerly await the refund that will wipe the rest of the credit card debt clean. Starting in March that money goes into an actual, for real, savings account and the climb begins.