by FiGuy
So you are anxiously awaiting your W-2, so you can file your taxes, and get that big refund. Is this a mistake? Filing for the refund isn't, but if you are consistently getting a big refund, you aren't making the most of your money. Would you loan a total stranger money for a year, at no interest? If you are getting large refunds, that is exactly what you are doing. You are giving Uncle Sam a loan, and getting no interest on it. Even worse, you are tying up your own money, instead of putting it to work for you. You earned it, you should be able to use it when you need it.If you are due a large refund, by all means claim it. You should file for, and get back, every dollar you are legitimately entitled to. Don't pad your claim, but do go after what the rules say you are due. If you really enjoy the forced savings aspect of the refund process, you may want to leave well enough alone, but most of us could use a little more money in our pay envelope. If you are one of them, but don't know how to go about getting it, read on. You will need to be cautious when you make the adjustments I'm going to recommend. If you overdo it, you will wind up owing money, and that is something none of us wants! Consult your tax professional, or if you do your own, run the numbers yourself - carefully - before you commit. You want to shoot for break-even, leaning towards a small refund, rather than owing anything.
Why do this? Well, you don't have to, and after I've explained things you may still decide you don't want to, but you should know you can so you can make an informed decision. Let's say for the last few years you have gotten a refund of around $1700. If you reduced that amount to $500, you would be seeing an extra $100 a month in your paychecks, which I'm sure you could put to good use, and you'd still be getting something back from Uncle Sam, rather than having to pay him come April 15th. Sounds like a winner to me! The IRS page I'm going to send you to later lists "Employees who would like to change their withholding to reduce their tax refund or their balance due" first on the list of people who could benefit from reviewing their withholding situation. If you get small refunds, then you do not want to make any adjustments to your situation, you are already in great shape.
So, how do we do this? Form W-4. That is the form you fill out when you first start work for an employer, listing the number of exemptions you take. The higher the number of exemptions, the less money is automatically deducted from your paycheck. File a new one, and claim a larger number than you currently do. Simply tell the folks in payroll that you want to do this, they'll know what you want, and should have the appropriate form on hand. They may caution you about doing this, and rightly so, but if you have your numbers down solidly, go ahead and go for it. This generally needs to be done at the beginning of the year so your numbers will be accurate, or when you start a new job, so this is the time to do it. You shouldn't need to do so again, unless you add to your family or get a raise or have something else change your tax situation, then you will need to look at your tax status again and decide if you need to adjust the number up or down accordingly.
The W-4 is a powerful tool, so again I warn you to be cautious, but the results can be well worth it. If you claim too many exemptions, you'll get a lot less deducted from your paycheck, but you could wind up owing big money at tax time. That's the potential downside risk. The upside is you will immediately see more money in your paycheck. If you have a complicated income situation, multiple jobs, self-employment, will be leaving your job before the end of the year, or have other factors that keep your tax status less than simple, a review will do you good as well, but you don't want to make any adjustments without understanding what the results could be, and that's a little beyond the scope of this article.
A quick way to find out what adjusting your W-4 exemptions will do for you is to go to this IRS page:
IRS Withholding Calculator
They have solid advice, and will give you good numbers to work with. You can also run numbers through a past years version of whatever tax preparation software you use. Don't just wing it, use your pay stubs and the appropriate tables to get real numbers, estimations may bite you later.
So, if you consistently get large refunds, reduce them in the future, and put a little more in your pocket each month while staying square with Uncle Sam by adjusting your exemptions on your W-4. Just make sure you've got a handle on the numbers so you don't wind up owing when April 15th rolls around.Standard CYA Disclaimer:
You should always consult a tax professional before making any changes that may change your tax situation.
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