Tax refunds cost you money in the long run

Citizen-Times, Asheville

April 23, 2009


Tax refunds cost you money in the long run

Clay Dangerfield Columnist

If you went to the grocery store and gave them too much money for your purchase, they would owe you a refund. But how would you feel if you overpaid every week for a year and then waited another few months to get your money back?

You should feel the same way about a tax refund from the state or federal government. If you get a refund, it means you allowed the government to take more of your money than they were entitled to and keep it for up to a year or more at 0% interest.

Nearly 40 million Americans receive a refund each year, averaging about $2,400. That means 40 million people allowed the government to take, on average, an extra $200 out of their paychecks every month, which they then ask to have returned interest-free a year later.

Overpaying your taxes month after month is a poor savings plan. Couldn't you use that $200 more a month when you earn it? Should you be getting some return for your $200 in savings?

Unless you are a big proponent of giving more money to Raleigh and Washington, it's time to plan now how to reduce your refund for next year, to have that money to invest now.

The most common argument for allowing a refund to occur is that taxpayers see it as a forced savings account. They consider their refund a reward or a bonus. But by increasing your take-home pay by $200 a month, you will be able to tackle your financial situation better than the government.

First, you'll need to determine your expected tax liability for the year. Pull out your file copies of recent years' tax returns, and also consider any changes you expect this year: If you expect to have a child, purchase a house, receive a large raise or bonus or celebrate a child's financial independence, it may affect the amount of tax you owe.

Then contact your human resource department or a good financial consultant and ask them to help you fill out a new W-4 form, and an NC-4 form for state taxes, to adjust your withholding to more accurately reflect what you expect to owe. Remember, HR people are there to help you, so do not feel embarrassed to ask.

Once your W-4 and NC-4 forms are filled out — which takes about 5 minutes once you've done the research to figure your expected tax liability — and they take effect, you should receive more money in your paycheck.

Be careful: The goal is to be in a better financial situation, and the temptation to spend that extra money is hard to overcome, especially divided among 24-52 separate paychecks.

If you're the average American and boost your take-home pay by $200 a month, here's what happens if you direct that money into an investment or savings plan. Assuming a 9% rate of return over a 10-year period, your investment would grow by $38,993. Twenty years would add $134,579. After 30 years, your investment would increase by $368,895. (These examples are for illustration only, not the reflection of any particular investment vehicle nor a prediction of your results.)

Too busy to make changes in your withholding for 2009? Well, if you wait 12 months to do this, then your investment in 30 years would be reduced by $33,942. So the small amount of time it takes to handle this is well worth the potential return. In addition, if you contribute the extra money to a tax-qualified retirement plan, your current income tax bill could shrink, since your taxable income may be reduced.

For additional information on your income tax refund, please consult a qualified tax or financial adviser whom you trust. You owe it to yourself and your family to spend some extra time on your finances so that you will be in a better financial position next year.

Clay Dangerfield is a married with three children, an Eagle Scout, and a business owner.

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Important: Remember to post the links everybody! Here's the link to the above column:

http://www.citizen-times.com/apps/pbcs.dll/article?AID=/20090423/MOUNTAINNEWS/904230352/1011/news01

I work in payroll and believe, me..the tax break is not enough to make a difference. Plus, there is this issue too:

The great obama tax cut to stimulate the echonomy what do think of it?
WASHINGTON (AP) -- Millions of Americans enjoying their small windfall from President Barack Obama's "Making Work Pay" tax credit are in for an unpleasant surprise next spring.

The government is going to want some of that money back.


But new tax withholding tables issued by the IRS could cause millions of taxpayers to get hundreds of dollars more than they are entitled to under the credit, money that will have to be repaid at tax time.

At-risk taxpayers include a broad swath of the public: married couples in which both spouses work; workers with more than one job; retirees who have federal income taxes withheld from their pension payments and Social Security recipients with jobs that provide taxable income.


Obama has touted the tax credit as one of the big achievements of his first 100 days in office, boasting that 95 percent of working families will qualify in 2009 and 2010.

Geithner responded that Treasury and IRS understood the concerns and were "exploring ways to mitigate that effect."

Rep. Dave Camp of Michigan, the top Republican on the tax-writing House Ways and Means Committee, said Geithner has yet to respond to concerns raised by committee members.

"So far we've got the, 'If we don't address this maybe it will go away' approach," Camp said.

IRS withholding calculator:

http://www.irs.gov/individuals/article/0...

Here is the link for more: http://answers.yahoo.com/question/index?qid=20090501032716AA8nR9p

Ever hear of hiding a bad scenario under a good one?

Here is another link about this with a different take on the issue: http://www.ask.com/bar?q=will+have+to+pay+back+the+tax+cut+we+are+now+seeing+in+our+paychecks&page=1&qsrc=0&ab=3&u=http%3A%2F%2Fwww.knoxviews.com%2Fnode%2F11130