Incredible No Big Tax Refunds
Don’t Over Withhold Taxes to Get a Big Tax Refund
Yes, we know getting that big tax refund is nice and it comes in handy. But it just doesn’t make good financial sense. You’re allowing self-serving politicians to play with your money with an interest free loan, and then you have to prove to them that it belongs to you by filing a tax return.
Another reason this coming year, for not over withholding, has to do with the Equifax credit bureau breach. Over 143 million individual accounts were taken, and many of them will be used to file fraudulent tax returns. If you’re not aware what happens then, let me explain.
These thieves file fraudulent tax returns very early when tax season opens and before the IRS receives the copies of W-2’s and other tax forms. They use your SSN and other pertinent information, along with fake W-2 forms. The IRS catches many of these fraudulent returns, but an awful lot get through. (Over a billion dollars in illegal refunds were issued on 2015 tax returns)
Then when you e-file your tax return, a notice is issued saying that a tax return was already filed using your SSN. At that point, you have to file a paper return with an affidavit proving who you are. It takes the IRS quite a while to investigate this, and if you are waiting for your big tax refund, you now have a much longer wait. That alone is reason enough to change your withholding.
If you normally get a big tax refund, you should file a new Form W-4 for the federal and one for your state as well, if refunds are generated there. Start by getting your copy of the previous year tax returns and review them carefully. Normally, you will need to increase the number of personal exemptions so that less tax is withheld.
Just be careful not to reduce the withholding too much and then have a large tax balance due when you file your tax return. Do it gradually, and calculate total tax withholding by annualizing the changed pay stub.
By increasing your personal exemptions, you will have less tax withheld and more take home pay. This is a good opportunity to increase your retirement savings. If your employer offers some type of retirement plan such as a 401(k) plan, you could put the extra take home pay amount into the 401(k).
That benefits you in a couple of ways. It increases your retirement savings with your increase and possibly more from the employer matching contribution. It also will reduce your taxable income and the total tax liability.
We hope that our explanation will convince you to change your withholding, if you normally receive a large refund. If you have any questions or comments, we’d appreciate it if you would complete the comment form below.
Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland. He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a multi-state law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.