Are you getting a large tax refund this year? Before you scream… yippee… you may want to ask yourself if this is a good thing.
While no one wants to owe money at tax time, getting a hefty return is also not such a good idea either. Don’t use the IRS as a savings account… they don’t pay you interest! You should ideally shoot for a small tax return, something in the neighborhood of one to two hundred dollars… no more. This will ensure you don’t owe any at tax time, but you also won’t throw your money away throughout the year either.
The key to making this balancing act work is in your deductions. If your tax return is large, anything over $400 would qualify as large, then you are claiming too few allowances on your W4 forms. You will need to determine what the appropriate amount to take is by a few different methods.
The first can be to fill out a new W4 form. Many people stay in the same jobs for many years and don’t update their tax forms except when they first started. As your life changes, it is important to update your employee tax records. In addition, if you haven’t filled out a tax form in awhile, you will be surprised to learn they have new formulas for determining your appropriate deduction amounts.
Another method is to ask your accountant. She should be able to look at your current year and based on your estimates for the future, compile a good amount for you to claim as your allowances on your W4. Remember this number doesn’t match the amount of dependents you put on your actual yearly tax forms.
Lastly, you can talk directly to the human resources department of your employer. They should have booklets that show how much is removed from your paycheck per allowance claimed. Using this method, you can look at your past year and estimate the next year to guess an approximate amount that you should have removed from each paycheck.
If you are excited to go spend your tax return, I hope I haven’t burst your bubble. Next year instead get more money back from each paycheck and use it to invest and have even more next year to spend!
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