I am looking to find out if it would be a good/beneficial idea to adjust withholdings for the next year, and use the extra money to pay down credit card debt. Using rough calculators, I am estimating around $3500 back from federal, and probably around $2000 from state. (Composite from several different calculators available on the web.)

We currently have about 90% credit utilization, and due to poor credit, we also have a high rate (6.1%) on our mortgage. I am married, with two kids under 6.

What I am planning for the anticipated refund is to repaint the house ($2000, pretty much mandatory to avoid mounting fines from the HOA), pay off $2500 in cards (Will basically pay off 4 cards), and putting $1000 aside as a hedge against expenses. (Obviously we will adjust based on actual return.) We are also planning on trading in my SUV for a more economical model at ~ 1/2 the payment ($490 down to $260).

With that, I am also considering adjusting my allowances (Currently at 5) and also adjusting the state % so that I will come out in the neighborhood of +/- $300 next year on the returns, and using the extra money generated from that and the car payment reduction solely for paying down cards (Dave Ramsey style).

Is this a good plan moving forward? If so, how many allowances will bring me to "net zero"? Or are there other opportunities I am missing?

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    how many allowances will bring me to "net zero" that's a bit of a hard question to answer precisely without seeing your tax returns. That said, if you google, there are plenty of free estimators. Might be a good start to check several and see what answers you get. Or, talk to a tax professional. – dwizum Jan 7 at 18:11
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    @dwizum - We usually get our taxes done through HR Block, we have had the same person the last several years. I will ask her when we have ours done this year (in a couple weeks, come to think of it) – EricDraven Jan 7 at 18:12
  • The IRS has a calculator for just this purpose: irs.gov/individuals/tax-withholding-estimator – RonJohn Jan 7 at 19:09

Intentionally overwithholding tax in order to get a big refund is essentially loaning your money to the government for free. Since you have debts and other obligations, you're not in a great position to use the IRS as a free savings account. I would definitely adjust your withholdings so that you can use your money more effectively.

how many allowances will bring me to "net zero"?

You'd need to project out your total tax for the year, subtract out what you've paid year to date, and calculate how much needs to be withheld each paycheck from here on out. That's easier said than done, but the IRS has a calculator that may get you pretty close.

At worst, increase the allowances by 2 or 3, and if too much (or not enough) is taken out to get you close to your total tax from the year, then adjust it again. There's no harm in adjusting it multiple times throughout the year.

Or are there other opportunities I am missing?

What other expenses can you cut? Are you contributing to a 401(k)? You could temporarily stop this until you get your debts cleaned up. I'm assuming you have many years until retirement, so you have time to make up for the lost match.

Could you just sell the car and use the equity (if any) to get a cheap car for cash, if only for a year or two? I'm concerned that you're going to lower your payment by overpaying for a cheap used car.

Also, consider setting some aside for emergencies just so that you don't have to borrow money to cover unplanned expenses. Remember, though, as Dave says, Christmas is not an Emergency. You just need to plan for it. Set aside $50 a month and by Christmas you'll have $600 for gifts.

All in all, $2,500 in credit cards and one car payment is not a terrible position to be in. Obviously you make decent money if you're getting $5k in tax refunds, so it sounds like just a little discipline and sacrifice will get you where you want to be quicker than you think.


The 4 cards is about 5% of the total CC debt. And I'm not contributing to a 401k currently, and I'm older than you think.

So things are a little more bleak that originally posed. That means you have about $62K in CC debt. You haven't specified your income (which is fine), but it doesn't sound like changing your withholdings is going to fix the problem (it just changes when you have cash to pay off debt). Now if changing withholdings keeps you from adding more debt then it can have some benefit. But it's not going to move the needle.

You need to first get into a position to not add any more debt. One way to do that is to create a cash budget to make sure you don't spend more than you bring in. Then set small, achievable goals that you can accomplish in a short enough time that you can feel the progress. You can do other things to accelerate the process by selling things, getting side jobs, etc. Obviously you're familiar with Dave Ramsey so I can speak from experience that his plan can work if you are disciplined enough to follow it.

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  • Not to horrify you, but the 4 cards is about 5% of the total CC debt. And I'm not contributing to a 401k currently, and I'm older than you think. – EricDraven Jan 8 at 14:20
  • Yeah, that does change things significantly. I'll update my answer. – D Stanley Jan 8 at 14:21
  • And I don't think there is enough equity in the car. I got talked into more car than I wanted when I purchased. It's a 2015 Ford Escape, 66 month term with 23 months left at 465/month. Zero percent interest, so that's something. (Still not sure how I qualified for that, but...) – EricDraven Jan 8 at 14:34
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    @EricDraven You probably "qualified" for that by paying more than you should have for the car. Most "0%" loans just bake the interest into the purchase price, so you're paying the same payment as if you had bought the car for less with interest. That said, don't make the same mistake twice - either sell the car and buy another for cash, or keep paying on it (since you're not paying interest) until you have enough equity to replace it for cash. – D Stanley Jan 8 at 14:42

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