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Large Refund: Check Your Withholding

April 10th, 2010 at 06:55 am

My friend with the bats is charging the bat removal fees to a credit card. She doesn't know if she can make the payments. However, she mentioned she could pay it off NEXT year with her tax refund. I'm aware that they often get large tax refunds, so I suggested they increase their withholding to get some of that money in their pocket NOW to pay those credit card bills. I wrote her an email, and no response yet.

Most people in the US love their large tax refunds. It is like winning a small lottery. Unfortunately, that is your money that the government has their hand on all year long and they aren't even paying you interest! You can change this, so that the money is in your pocket now.

Last year, our refund was $399 from the federal government. I think if the Making Work Pay was not in place we would have nearly broke even on taxes. It has taken a few years for me to get it that close, but it nice to see the government doesn't have access to so much of our hard earned money.

First go to the IRS website, and use their http://www.irs.gov/individuals/article/0,,id=96196,00.html?p... to determine their suggested number of withholding allowances for your income. Compare this to what you already withhold. It generally will be a higher number than what you are already claiming. Some people only claim allowances based on the number of people in their family. We have four members, but we claim 9 allowances.

If the witholding calculator on the IRS website is confusing, you might consider looking at an actual copy of a http://www.irs.gov/pub/irs-pdf/fw4.pdf. It has written instructions, that tell you based on your situation what number of allowances to claim. This is the same form you will fill out at your employer to change the number of allowances want to claim.

I bet now you are worried or curious about how those increased allowances will change your paycheck, right? I've used this http://www.paycheckcity.com/ at paycheckcity.com for years, to calculate our net paycheck. (I noticed this website also has a W-4 assistant, or another calculator to determine your allowances.) Play with it a bit. Try the witholding the IRS suggested. Look at how much extra you will get added to your paycheck each pay period! Nice, huh? That's your money the government was going to hold on to for you until the next tax filing period. You want that money don't you?

If you still want a bit of a refund, consider lowering the suggested withholding by 1. Also remember to go back to the calculator at the very beginning of 2011. Your withholdings may need to change because this year you are adjusting mid year. The number may be higher to make up for claiming less allowances earlier in the year.

Just messing with the calculators will give you lots of information. Remember to actually fill out the new Form W-4 with your employer to make it happen.

2 Responses to “Large Refund: Check Your Withholding”

  1. monkeymama Says:

    I have had more than one woman tell me she would "do anything to stay home with their children." I have given tax advice and pointed out that one income is a much bigger take-home than they expect since one income is not as heavily taxed as two incomes. But, these astute people notice that I mention changing the first income's withholding. "What? We have to give up our tax refund???" Well, um, yeah, if you want to be able to cut your income by 30%+, it is helpful to not withhold more taxes than you need to. Lord knows I have never withheld a penny more than I owe.

    Forget it, no one can live without a tax refund. I am sure your friend will think it is a terrible idea. Wink
    People just amaze me when it comes to tax withholding. I understand that they just don't know how to save, otherwise.

  2. ceejay74 Says:

    Yeah, people drive me nuts with that tax refund thing. You really, really couldn't be trusted to hold that money yourself, or use it incrementally instead of all at once? All it took was one crappy H&R Block tax course and the words "interest-free loan to the government" to convert me from loving big refunds.

    Of course, I hate even more the idea of owing a penalty (no such thing as an interest-free loan FROM the government, natch), so I'm cautious with my withholding. Our finances have fluctuated a LOT over the past 5 years. But once I see this year's taxes, I should be able to get a pretty accurate withholding figured out, because our situation will stabilize at least for a year.

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