Large Refund: Check Your WithholdingOriginal Post from April 2010:
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 withholding calculator 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 Form W-4. 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 website 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.