Big Tax Refunds Can Cost You
Sandra McKinnon, M.S., Consumer and Family Economics,
College of Human Environmental Sciences, University of Missouri
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.
However, 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 $2,000 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, former 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
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
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.
Last update: Tuesday, October 18, 2011