Like many taxpayers, you probably get a refund each year when you file your taxes. Last year ≈73% of individual tax returns resulted in refunds. The average refund was $2,783.
It’s no secret that taxpayers use the tax withholding system as a form of savings. Too much money is taken out of your paycheck throughout the year and is refunded back to you after you file your tax return. It seems like a windfall, but of course it isn’t. It’s really YOUR money the government has been holding for you.
One argument against getting a refund is you’re giving an interest free loan to the government. However in today’s interest rate environment that’s not much of an argument. On an average refund that’s only ≈$10 of interest a year at an online bank. Better than a kick in the pants, but hardly compelling.
But here is another argument against letting the government babysit your money all year:
Identity theft is a large and growing problem.
The IRS estimates they pay out over $6 billion a year to thieves. The scammer files a fraudulent return using your social security number and claims a large refund. When you file your legitimate return it is immediately rejected because a return has already been filed with your Social Security number. Of course you are the rightful recipient of your refund but getting this sorted out with the IRS, a behemoth bureaucracy not known for stellar customer service, can take up to 18 months or more! You could be in a real bind if you’re counting on that money to pay a large bill or go on vacation.
At a recent dinner for tax dorks (the Massachusetts Society of Enrolled Agents) the speaker asked how many in the audience have had a client who was a victim of tax-related identity theft. Amazingly almost every hand went up!
If you get a big tax refund, you can reduce it by lowering the amount of tax withheld from your paycheck. Ask your payroll department for a W-4 form to change your withholding. Or you can get one from the IRS website. Ask a tax professional to help you with the numbers. Or you can get a pretty good idea from this easy-to-use tax withholding calculator from Kiplinger. Currently this calculator asks for 2013 numbers, but you can input your 2014 numbers. This quick and easy calculator is a helpful guide – but not gospel. If your tax situation changes in 2015 the calculator will not be accurate.**
It is easy in today’s digital age to save money without sending it on a round trip to the government. Once you’ve decreased your withholding, set up an online savings program and have the extra money automatically transferred out of your checking account the same day your paycheck gets direct deposited.Make it automatic and send it away– out of sight, out of mind. You can start collecting next year’s refund with your next paycheck.
**One common tax situation change that surprises many taxpayers is the loss of the Child Tax Credit. The year your child turns 17, even if it’s on December 31st, he or she is no longer eligible for the Child Tax Credit. This could increase your tax bill by as much as $1000/year. Not all families get this credit- it is phased out at higher incomes. You can look on Lines 52 and 67 of your 2014 Form 1040 to see if you got it.