Las planillas. Our favorite season of the year (not). February is kind of chaotic for salaried employees in the island. We get to prepare our taxes and file for either a return or a pay extension to pay uncle sam. Thankfully I did my math right and managed to get a tiny refund, but man oh man how confusing it is to actually get an accurate number – want to have a look at how an avarage joe handles taxes in the island? Well even if you don’t, I’m doing just that.
I’m an excempt salaried employee so my taxes are pretty straight foward. Even if I were to work from the mainland, I would still only have to worry about submitting my W2 form. In the island we get a special one, the W2-PR which is essentially the same thing but with extra spaces for some fields used in very specific forms. To me, I only care about the withholding, the social security and the amount I paid on healthcare. To fill my taxes I get a tax calculator (literally the only one I trust) from taxmania.com and simply fill up every box that’s required. I make sure I enter my baby as a dependant, and make sure I enter the interest paid of my wife’s student loan as a deduction then I enter the amount I put aside on my traditional IRA and make sure I add any money made from bank accounts (interests from savings) and report it and pay taxes for those.
Out of a salary of around $55000, my total taxes float at around $10,000. I prepare for that early in the year so that my checks retain enough to not have to worry about forking out 10k at the beginning of the year.
Around tax season I revise my pay witholdings, this is something I always recommend since more often than not the law changes and suddenly some deductions that existed in a prior year won’t exist on the next. For example if you live in the US and pay federal taxes, this is what the Tax plan that president Trump did this year, it lowered withholding so your check looked bigger but in reality that money had to be paid anyways and people forgot to modify their payroll withholdings – this caused them to lose tax returns.
In Puerto Rico we don’t have to pay federal income taxes, but we still have some government officials messing around with the tables from time to time so I try to revise every year just in case. When you go to HR to modify your withholdings, the most you’ll do is ask to include some allowances (think of them like credit that you can claim in advance from deductions that you expect to apply when filling for your taxes), in my case I have 2 on my W4 which puts around $100 extra on my bi-weekly check vs having no allowances. Its low enough to impact my check, and good enough to give me about $95 in refund without adding any other deduction (like dependant and interest paid on student loan).
Pretty similar to what you would have to do in the states, only that we only worry about state taxes and our W4 is made in such a way that people normally don’t pay attention to the allowences when they get employed.
If you’re starting out a job and already filled your W4, you can modify it at any time by talking to your HR person or manager. Chances are you didn’t put any allowences and you’re overpaying the government on taxes – this will give you a refund, but it’ll also mean you’ll be losing out on some early money (or interest if you put that money aside instead of using it up).
The way I organize my numbers is; fill up my taxes so that I get an initial estimation of how much I have to pay, modify my allowences so that I owe (or get a very tiny refund), have a separate savings account dedicated for tax amount, divide my ‘estimated tax’ by the number of checks I’ll receive in the year and deposit that amount to the savings account throughout the year. By the time tax season comes back, I have more than enough saved up on that savings account, and I get a little bonus out of the interest AND if the tables change for the better I get a refund PLUS the savings account amount. And a pro tip that has worked perfectly for me is using an app like Acorns or Stash which deposit automatically and invest so the interest gained is larger.