Monday, February 7, 2011

Am I Better Off With A Big Tax Refund ... Or More Money In Each Paycheck?

No question about it - take the money in each paycheck!  I can't tell you how many people have told me they purposely have too much tax withheld from each paycheck, because it's the only way they can save.  So they pay banks $200-$400, or more, each year so they can save with Uncle Sam at zero interest.  These same people then either tell me they can't afford to pay down their credit card balances, or can't afford to save up for an emergency fund so they wouldn't need to use their credit cards so often.

This blog post continues to tell you how easy it is to put this extra $200-$400 (plus your tax refund itself) back in your pocket throughout the year!
Thanks for reading on with me!  It's not just my clients that has this challenge.  USA Today ( reported that the average tax refund paid by the IRS in 2010 was over $3,000.  Meanwhile, the average American adult carries credit card debt of over $10,300 at an average interest rate of 13.44%.  (This is based on Federal Reserve data shows that there was just over $2.4 trillion in total credit card debt in November 2010 ( and U. S. Census Bureau statistics that show there were 232.4 million adults over 18 in the country as of July 2009 (

You and every employee in America fills out Form W-4, which determines how much federal income tax is withheld from every paycheck.  It is a three page form, but most people never make it past page one.  They just fill in their name, address, social security number, marital status, and how many withholding exemptions they think they are entitled to.  Many purposely put in a low number of exemptions to make sure their refund is higher.

The other two pages of Form W-4 provides a worksheet and instructions designed to make your withholding as close to your actual tax liability as possible.  You should take a little time to read through this and try to complete the worksheet so that you still get a refund ... but usually only in the zero to $500 range.  I don't want you to owe with your return, and for sure I don't want you to have to pay a penalty because you didn't have enough tax withheld during the year.  But it is possible to work through Form W-4 to get your refund in the zero to $500 range.

If you are one of those that has been getting the average yearly tax refund, you will now have $200 or more extra in your paychecks each month.  Be disciplined.  Purposely pay this additional net pay towards the credit card you have with the highest interest rate.  If that is one with an average 13.44% rate, you'll save about $200 in interest over a year ... and the balance you owe will be about $2,600 lower after doing this consistently every month for a year.  If you have a card at 29.99%, and many people do, then your savings will probably be more than $400!

If Form W-4 confuses you, your tax pro will probably be happy to meet with you, look at your prior year tax return and your current pay stubs, and help you fill out this form for a fee that is much less than the interest you will save.  If you don't have a tax pro, or they aren't interested in dealing with Form W-4, sent me an e-mail at  I'd be happy to help you, and I think you'll be pleasantly surprised with how easy it is to do this in a few e-mails back and forth!

Photo Credit:  Winning Money by Petr Kratochvil

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