Tip of the Week February 18-25

Are you getting a tax refund?

The average tax return was a little over $3000 last year, according to CNN Money. This might seem like a really good thing to get money back from the government. I want you to think about this for a minute. One of two things are at play here, and sometimes both. You are either paying in too much money and thus receiving it back or you are receiving money that you didn't pay in the form of credits (earned income credit- EIC, child tax credit and such). Or like I said you are doing both and receiving a very large refund because you are not only paying too much but also receiving the credits.

The credits you really can't control since that's just how things are with the current tax system. You can however control how much you pay in. Here's a hint: if you are consistently qualifying for those credits, in particular the EIC, you should be paying very little if anything from your paycheck. This is because those credits offset any negligible amount you would need to pay. This would mean you make less than average household income ($49K/year) and have children. Add that to any other major deductions you may take- mortgage interest, charitable contributions, medical expenses, Roth IRA contributions. You could really get a bundle back...which isn't necessarily a good thing.

Homework:
So what do you do about this? If you are getting a refund I want you analyze why. Change your W-4 to reflect the proper amount of exemptions to claim. If you are unclear on this please see you tax consultant for the right number and/or talk with your HR director. This may be more or less than the number you come up with using the W-4 questionnaire. Also be sure to update it regularly when you have a change in income, number of dependents or life situation. Your goal should be to get the amount owed or refunded as close to zero as possible. After all who wants to loan the government money interest free for the year.