Anticipating a Tax
Refund? Don't Celebrate
The IRS reports
Federal tax refunds to individuals totaled
more than $202 billion last year. Nearly 100 million taxpayers got
refunds (3 out of 4 returns). The average refund was slightly more than
A tax refund isn’t as much cause for celebration as
many think. A refund means that you paid too much in taxes during the
year. In case you didn’t notice, Uncle Sam didn’t pay any interest back
while he held your extra money either. Although a lot of people consider
a refund “found” money or a forced savings plan, if you get a tax
refund, you are giving the government an interest-free loan.
A tax refund is money you earned and could have access to
throughout the year instead. For example, say you receive a $2000
refund. If you adjust your withholding, you could have an extra $166.66
each month available to you to spend, start an emergency fund, invest,
or use to pay down debt.
A rule of thumb is that if you received a refund over $500
or owed more than 10% of your total tax bill, you should adjust your
withholding. For most taxpayers, this can be adjusted by modifying the
number of allowances claimed on your W-4 (the form you file with your
employer when you begin employment). You can change your number of
allowances (altering the amount of taxes withheld from your paycheck) at
any time. The more allowances you claim, the less tax is withheld. Your
goal is to have withheld at least 90 percent of what you think you’ll
owe for a year.
There are 3 steps to follow to adjust your withholding:
STEP 1 – Anticipate changes. Anything that lowers
your tax bill (tax credits, exemptions, deductions, etc.) can be
considered in your allowance calculation. Did you get married? Divorced?
Have a child? Purchase a new home? Refinance a current mortgage? Earn
more/less money than last year? Begin paying on your student
loans? Capital losses? Ask yourself questions that will determine
whether it makes sense to alter your allowances even if you didn’t get a
large refund because your situation may be different this coming year.
STEP 2 – Use a
withholding calculator. The
simplest way to check the “accuracy” of your number of withholdings is
by accessing the Missouri Department of Revenue’s online withholding
http://www.dor.mo.gov/tax. Employees can use it to do tax planning
and project future withholdings and changes to their Missouri and/or
Federal W-4. Another option is to get IRS Publication 919 How Do I
Adjust My Tax Withholding? at
http://www.irs.gov/pub/irs-pdf/p919.pdf. It contains the necessary
worksheets and instructions.
STEP 3 – Take
action. If altering your
W-4 would be beneficial, do it! Simply download a new W-4 (http://www.irs.gov/pub/irs-pdf/fw4.pdf),
fill it out and turn it into your human resource office.
For more information about
saving, investing, or paying down debt, visit