|There has been a great deal of news concerning tax refunds going out despite the government shutdown. The IRS has confirmed that it will provide refunds to taxpayers as scheduled. While I am guessing there was a collective cheer around the nation, please allow me to dampen your enthusiasm.
It’s clear that many people get excited at the prospect of what they see as a windfall when they get that big tax refund. However, the truth be told, the fat refund isn’t a gift from the IRS. In fact, when it writes that big refund check, the IRS is merely giving you back money it owes you. That money was already yours to start. Sadly, when you get a big tax refund, it means you have loaned the government money from your paychecks throughout the year. And the government is not paying that back with interest.
Some people just enjoy getting that big check each year. It make them happy for some reason. I actually have no way to respond to people who think like this. Other people justify the big refund by calling the financial bonanza a forced-savings strategy. I see a big problem with that. I bet when most people get the money back, there’s a good chance they’ll spend it right away on a hi-def TV or that vacation they have been planning. So much for the saving idea.
So, how do you fix this problem? It all comes down to one form: the W-4. You’ll need to change your tax withholding status so that you don’t have extra money taken out of your paycheck. The more exemptions you have, the less will be withheld from your paychecks in taxes. Meanwhile, the fewer exemptions you claim, the more your employer will withhold from your paycheck. In a perfect world, you’d want to set your withholding rate so that your tax bill comes close enough that you only owe or get repaid a few dollars in federal taxes.
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