Are you anticipating a big refund this year?  Since getting a large refund actually costs you money, you may want to do some tax planning each year in order to minimize the amount you get back.

If you are among the millions of taxpayers who receive a refund each year it’s important to understand how that refund is costing you money and the benefits of reducing it.  You may be more than happy to accept a big refund check, but consider the following:

You do not receive interest for refunded dollars.  Therefore, had you held on to that money throughout the year it could have been made productive by paying off debt or used for investment.  Tax could have been deferred on both the investment and its earnings if the money had been added to a 401 (k) plan.
Additionally, your employer may have even matched all or part of your investment.

W-4-squareAlthough most taxpayers receive their refund promptly, certain circumstances or errors can cause delay.
Until you have your refund in hand it is not available for use.

Consider reducing your withholding or estimated tax payments in order to manage a potential refund.  Generally, withholding must equal 90% of the current year’s liability or the amount of the prior year’s tax.  It is relatively easy to avoid withholding too much if your annual income does not change by much.
If you are having too much withheld you should consider filing a revised Form W-4 withholding statement with your employer.

The problem can be more complex for taxpayers with fluctuating income or multiple sources of income.  A worksheet is available with Form W-4, though many find the form to be complex.  Feel free to contact our office if you would like assistance adjusting your withholding.

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