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Big Tax Refunds Can Cost You
Sandra McKinnon, M.S., Consumer
and Family Economics
College of Human Environmental Sciences, University of
Missouri Extension
The IRS reports that Federal tax refunds to individuals totaled more
than $217 billion in 2006. Nearly 97 million taxpayers
got refunds (3 out of 4 returns). The average refund was
a little less than $2,255. These numbers are expected to
increase this year.
By now [hopefully], your taxes have been taken care of.
But that tax refund may not be cause for celebration. A
refund means that you paid too much in taxes during the
year. In case you didn’t notice, Uncle Sam didn’t pay
you any interest while holding your extra money either.
To many people a refund is “found” money or a forced
savings plan. But, if you get a tax refund, you have
been giving the government an interest-free loan. Some
people won’t even do that for their relatives.
A tax refund is money you earned and could have had
throughout the year instead. For example, say you
receive a $2000 refund. You can adjust your withholding
and have an extra $166.66 each month to spend, set aside
for emergencies, invest, or pay down debt.
If you got a refund over $500 or owed more than 10% of
your total tax bill, consider adjusting your
withholding. Most taxpayers can make adjustments by
modifying the number of allowances claimed on their W-4
(the form you file with your employer when you begin
employment). Most people fill it out and never see or
think about it again. You can change the number of
allowances you claim on the W-4 at any time, which
alters the amount of taxes withheld from each paycheck.
The more allowances you claim, the less tax is withheld.
Try to have at least 90 percent of what you think you’ll
owe for a year withheld. The W-4 worksheet helps you do
that.
According to Dr. Mark Oleson, director of the
Office for Financial Success at the University of
Missouri, there are three
easy steps to adjust your withholding:
STEP 1 – Anticipate changes.
Anything that lowers your tax bill (tax credits,
exemptions, deductions, etc.) can be considered in your
allowance calculation. Did you get married? Divorced?
Have a child? Purchase a new home? Refinance a current
mortgage? Earn more (or less) than last year? Start
paying off student loans? Suffer capital losses? Ask
yourself questions to help you decide whether it makes
sense to change the number of allowances--no matter how
big your refund was this year. Why? Your situation may
be different in the coming year.
STEP 2 – Use a withholding calculator.
A simple way to check the “accuracy” of your
withholdings is to use the Missouri Department of
Revenue online withholding calculator at
http://www.dor.mo.gov/tax. It walks you through the process. Another option is to
do it “the old fashioned way.” IRS Publication 919, How
Do I Adjust My Tax Withholding? (http://www.irs.gov/pub/irs-pdf/p919.pdf) contains the necessary worksheets and instructions to
do the calculations on your own. You can use them to do
tax planning and project future withholdings and changes
to both your Missouri and Federal W-4.
STEP 3 – Take action.
If altering your W-4 would help you, do it! You can
simply download a new W-4
(http://www.irs.gov/pub/irs-pdf/fw4.pdf), fill it out
and take it to your human resource office.
For more information about saving, investing, or paying
down debt, visit Missouri Saves (http://missourifamilies.org/mosaves).
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Last update: Thursday, January 17, 2008
