If you got one of these, after you filed your 2014 federal tax return, you probably were quite pleased with yourself.
Big tax refunds cause some people to celebrate. They have all kinds of plans for what they can and will do with their windfall. New car. New TV. New clothes.
But, when you stop to think about it… Are big refunds really a good thing for you?
If your tax refund is the only way you’ll save money, then maybe, the refund makes sense. A financial adviser might make more sense, but that’s up to you.
If you got a tax refund because you have your employer withhold too much of your hard-earned money each pay period, well, that might not make the most financial sense.
So here’s what you ought to do.
Call your tax preparer and have him or her review your 2014 federal tax return with you. Pay close attention to your tax preparer’s advice. If he or she suggests you’re withholding too much, then make a change. Say, for example, you claimed zero allowances when you first filled out this form.
Zero, obviously, is the lowest number of allowances you can claim. It’s often advised for people who can be claimed as a dependent on another individual’s tax return. It’s also the number your employer must use if you fail to submit a W-4 form. Zero tells your employer to withhold the maximum amount of taxes from your paycheck. The maximum may be more than you’re required to pay in taxes. If that’s the case, the IRS owes you a refund after you file your taxes.
Let’s say you changed that zero to a one. (This is often recommended for a single taxpayer with one job.) Now your employer withholds less from your paycheck each pay period, and more goes into your pocket.
That’s money you can use throughout the year, instead of waiting for Uncle Sam to refund it after you file taxes. Here’s another way to look at: When you get a big tax refund, it means you’ve given Uncle Sam a big interest-free loan. When was the last time you got an interest-free loan?
Of course, this withholding thing works both ways. So, if you had to pay taxes this year, you may want to increase your allowances on your W-4 and have your employer withhold more each pay period. The goal is to strike an even balance – you don’t want to owe money to Uncle Sam or be subject to an underpayment penalty, but you also don’t want to give him a big interest-free loan.
Now, some of you out there may think this idea stinks. You like your refund and you want to keep it coming. If that’s you, more power to you. At least you understand yourself.
If it’s not you, talk with your tax preparer and see if you need to change that W-4 form.