Tax Refunds, are
You Really Getting What You're Due?
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Every year, millions of people in the United States allow the government to borrow their money interest free; by claiming less tax exemptions on their employee W-4's than what they actually qualify for.
Some even request the government to withhold extra money so that their refund check will be even larger when it finally does come. If you are one of these people, please reconsider this big refund strategy.
I have several wonderful and intelligent friends who make the same argument as you may be thinking right now; "I want that big refund check!" Or, "I certainly don't want to owe the IRS any money at the end of the year, so I'd rather have them take out more than enough to make sure it's covered."
And maybe even more common, "If I don't let the IRS keep my money, I'll just blow it anyways. But if I let them keep it during the year, then when I get that huge refund back I can spend it on something really big!"
For some people, this *interest free loan* they are handing over to the government amounts to hundreds of dollars. But for many others, it's adding up to thousands. If you consider yourself to be a bit more tax savvy than this, please do not make harsh judgments about the people who are opting for a big refund. They are sincere in their beliefs that they are doing the right thing and it's just about impossible to change their mind.
However, my husband and I both try our best to do just that every time we find another person lost in the refund cycle. It's a difficult task, but we think we've come up with a solution that may convince them, or maybe even you.
But first, you need to go to your employer and fill out a new W-4 with the correct amount of exemptions you are due. You have the legal right to do this anytime you wish. The form will provide information for figuring the correct amount, but you are also free to figure it for yourself.
You'll want to include one for every member of your family that will be reported on Form 1040 as an exemption. Next, you can safely estimate another one for every $2,800 worth of itemized deductions you will have such as medical expenses, mortgage interest, charitable contributions and job expenses not reimbursed by your employer. These things are also included on your state forms.
It will also be helpful to look over last year's tax forms to see what your deductions will total, figuring in any differences for the coming year. Don't forget to include any tax credits that you may have coming as well, such as a portion of your childcare expenses, education, and credits for the elderly or disabled, adoption and the new child tax credit ($500 per qualifying child).
Just be careful figuring things that are not included on your state tax forms. When you increase your number of exemptions on your W-4, this will cause less money to be deducted from your federal AND state taxes. For example, if you figure in the child credit which is not a deduction on your state forms, you may end up owing some money to the state at the end of the year.
Also check to see if there are any penalty fees if this were to happen, though usually they only apply to a large amount of underpayment. But if these penalties may apply to you, then it's best to stick with the deductions that are on both the federal and state forms.
If you do not itemize deductions, but instead take the minimum Standard Deduction, figure the extra exemptions based on this amount. For example, the Standard Deduction for a single person this year is $4,000.00, so you could safely add one to two exemptions because this deduction will also lower your taxable income even further.
Whether you owe just a little, or get back just a little, the point is to get the difference as close to zero as possible. Now, with the money you will be getting back on your paycheck, where it belongs, you can either add it to your monthly budget if you need it to live on or set up an automatic savings account through your bank.
By having the money taken directly from your paycheck to the bank, the money will go straight into your savings account before you even see it. This should remove your worry of not having the willpower to save it yourself.
And this way, you'll be earning the interest on your money instead of the government taking advantage of your unintentional generosity. Not only will you be earning interest on your money, but you will also be earning interest on your interest.
In the 1950's, American families paid an average of 3% personal income tax per year. It may not have seemed as important to maintain control of that money as it does now; for the average family taxes are up to 30%, making it an absolute necessity to keep track of this large price tag we are paying to support our country, great as it is. And every year the tax laws change, so you'll need to keep informed and adjust your W-4 exemptions if necessary.
You do not have to hire an accountant to file your taxes either; the forms are not that difficult to figure out, and each one comes with detailed instructions. Once you've done them a few times they will become second nature. Last year I had a dozen forms to fill out and I managed to get through them like anything else, one step at a time.
We had the standard 1040 with attached schedules, the sale of our home, a new baby, moving expenses (two job transfers in one year), and 3 separate state forms with more attached schedules. To tell you the truth, I was dreading having to fill them out at first. But I plugged away at them until they were all complete. They can be time consuming, depending on your particular circumstances, but working on them a little at a time will help.
The IRS is also a great resource for help in filling out your forms, and they offer this service for free, I did have a few questions for them last year and they were very helpful. They can be reached for assistance online at www.irs.gov, or by phone at 1-800-829-1040.
If you are a fan of big refunds, I hope you will at least consider what I've said. Call your bank and see what kind of direct deposit accounts they have to offer. Then take some time to think about it.
Sometimes you need to start out with a small deposit to get the automatic savings withdrawal set up. But if you already have a refund coming this year, you can set a small portion of it aside for this very purpose.
This will also enable you to have access to your money in the case of an emergency, instead of having to use a credit card that charges you 8-22% interest. And, if at the end of the year you can get by without using the money (and compounded interest) you have saved up, you might consider looking into money markets or long-term investments to maximize your earnings!
Or, you can just set yourself up for another big refund next year and buy a new TV instead. It's up to you. I can hear some of you thinking about that new TV! It's okay, I'll write about this again until I convince you to start earning interest on that refund money!
Copyright © 2001 by Michelle Jones, editor of BetterBudgeting.com