As we head into the final month of the year, besides Christmas and New Year’s, one of the main topics that is brought up is preparing for your income taxes. There are always articles about what you can do in December to help increase your refund in April. According to an article in USA Today, the average refund for 2009 was $3,036. However, the question needs to be asked, is it a good thing to get a tax refund?
A tax refund is simply an overpayment of taxes owed to the IRS. For example let us take a family getting a $1,200 refund. That means they had $100 too much withheld from their paycheck each month. So it basically means that you gave the IRS an interest free loan for a year! Instead of getting a refund, have $100 each month extra in your paycheck and put it in your budget. By doing that there is a good chance that come tax time you won’t have that credit debt that you usually pay off with your tax refund!
To adjust your withholding you will need to adjust your W-4 at work by contacting your HR or payroll department and claim more dependents. It does not matter if the number of dependents you claim is greater then your actual dependents. Often claiming just the number of people in your house will not be enough. This is because itemized deductions vary from family to family, basically rendering the IRS withholding tables useless. You are now ready to take that extra money and put it aside for paying down debt, taking a big vacation, or saving for bigger purchases.
The key is to STOP using the IRS as a bank! Take control of your own finances and start using your money to help you out instead of helping the IRS. Before making any big tax changes I recommend first consulting your CPA to make sure you are projected to get the same tax refunds you have been receiving in prior years. It is probably too late to change anything for 2010 but by projecting out to 2011 and beyond you can start to make better tax-planning decisions and put more money in your pocket sooner!