* * *
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
refund strategy.
I have several wonderful and intelligent close
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 1 for every
member of your family that will be reported on Form 1040 as an
exemption. Next, you can safely estimate another 1 for every $2,800
worth of itemized deductions you will have such as medical deductions,
mortgage interest, charitable contributions and job expenses not
reimbursed by your employer. It is also a good idea to look over last
year’s tax forms to see what your deductions will amount to be,
figuring in any differences for the coming year.
Don’t forget to include any tax CREDITS 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). 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 check to the bank, the money will go straight into your savings
account before you even see it. But 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 normal 1040 with attached schedules, the
sale of our home, a new baby, moving expenses (twice), 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
reconsider. At least call your bank and see what they have to offer,
and take some time to think about it after you get the information.
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.
Copyright © by Michelle Jones. All rights reserved.
Reprinted with permission.
