If I see one more financially savvy person expecting a huge tax refund, I’m going to scream. I don’t get it, why don’t you like your money? I like my money warm and safe in my bank account. I don’t lend my family money, why would I lend it to the government? You don’t need to wait till tax time to get your money back. It’s easy to adjust your withholding and get your money now, not later.
But I Like my Refund
I’ve yet to see a single good argument in support of large refunds. There is no benefit to it, you’re simply getting back money that is yours. Even worse the government doesn’t bother paying interest on that loan. Meanwhile you’ve had unexpected bills or emergencies come up, you’ve had to dig out the credit card or dip into savings to cover them. You’ve put off large purchases or neglected your emergency fund, all in anticipation of a refund. Some call it a forced savings plan but the fact is - most people spend that refund.
How Taxes are Withheld
The government doesn’t trust you to pay all of your taxes at once nor do they like waiting for their money, so they make your employer withhold it from each paycheck. The amount depends on your salary, your family and the current tax codes. Your employer has you fill out a W-4 form so they can estimate your withholding.
The basic W-4 form takes into account your filing status and family situation. You can claim an allowance for yourself, your spouse and your kids. There are also certain allowances for childcare costs. Most people are due a refund because either their family situation changed or they have a large number of deductible expenses. The second page of the W-4 form includes a worksheet to help you translate your deductions into allowances. The more allowances you claim, the less tax will be withheld.
How to Calculate
The IRS provides a worksheet to help you calculate your allowances for deductions. There are also websites like Paycheck City that will guide you through the process. The basic equation is:
(Estimated Itemized Deductions – Standard Deduction)/$3500 = Allowances on W-4
I happen to claim 8 allowances on my W-4 even though I’m single with no kids. A LA sized mortgage and California’s tax rate will do that to you. This year I will be getting a $400 refund from the federal government, close enough to my goal of $0.
Each state with income tax will have its own version of this form. The calculation will be different so follow the directions. Paycheck City has state calculators available, but you must register to access them (free).
Adjust your W-4 Form
Now you know that too much tax is being withheld. This is easy to fix, you can download the necessary forms online or ask for them at work. Reduce your withholding and have more money in your paycheck all year long. Use it to get out of debt, build up your savings and for life’s everyday needs.
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10 comments:
I like my money and this year I'll be seeing more of it. As you know, I am one of those generally financially savvy persons expecting a huge refund. I admit, I totally screwed up. It was my first full year as a homeowner and I actually forgot to account for all my mortgage interest when calculating my withholding; I used last year's partial year totals. BIG oops!. I just about gagged when I realized I could have kept about $450/paycheck more. I have since changed my withholding so next year look for my post about how I receive a much more rational (small) refund and actually have to pay the state of California a few bucks like I always used to.
I absolutely agree.
Why have the government hold you money just to give it back to you?
It has taken me years to fine tune how much I have to work to equal how much tax I need to pay and which tax bracket do I want to be in.
It is worth the exercise.
Agree! This is why I always do my taxes as early as possible. I want my money back as soon as possible!
The only time I'm ok with getting a big refund is if my tax situation had some major changes that I couldn't accurately estimate. In those cases I usually err on the side of caution and get more deducted. 2008 was one of those years because it was my last year of school and first year with 401k and other benefits.
For 2009 I'm not expecting to get back more than a few hundred dollars back now that I've adjusted my withholding. I've just gotten my first paycheck with the new withholding and already adjusted my budget for the new amount. (Yay!)
Thank you!! I feel the exact same way. This time of year always makes me twitchy. I hate hearing about people planning for big refunds. Because my situation changed drastically this year I have no idea how I'll turn out, but once I do I will make the adjustments needed. I have a friend who loves his return, so one year I promised that if he gave me $20 a week I would guarantee a $1000 return in a year - I was making a joke to make a point, but to my chagrin he actually thought about it!
Haha, might this post have been sparked by me?
I don't think I'd be happy with a huge refund (the avergge is ~$2400!), but a few hundred dollars isn't too bad. I tend to be too cautious as well - this year I have no idea how marriage is going to affect what we pay, so I'm a little worried. The IRS withholding calculator said we'll wind up owing $4000!
Come to think of it, that calculator is almost always wrong for me. Wonder if the IRS is pulling a scam.... ;-)
But I like my refund!! I like it to be, ideally, about $1k.
My efund isn't neglected, expenses haven't gone on a CC, and I missed out on $30 in interest MAX.
Just personal preference, I guess. I am surprised at some people who are getting several thousand, but if that is how they want to do it... Whatever.
Well, I like my money. But I've made lots of little mistakes and adjustments along the way to get to the point where my refunds are minimal, if anything. I think I've got it right this year! (I have weird, unpredictable income.)
I had no idea I could do that. Thanks for the tip. I will do this now.
I'm right there with you. I tell people all the time that they can adjust their withholding. They just need to be able to estimate with some certainty what their filing status and dependent situation will be at the end of the year. The other day a woman came in and she hadn't realized 'til the end of the year that she would be filing with no dependents this year. She ended up having to write an unfortunately sizeable check to the IRS because she could no longer be Head of Household, claim two exemptions, or get any of the credits she had previously gotten for her dependent. So you have to be smart about your withholdings both ways.
Good post.
Oh WOW! I thought I was the only one!! I totally agree.
My boss told me recently that he got back a $13K tax refund. What? You let them borrow all that for NOTHING??
I try to get my refund/payment under $100...it's the way to go!
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