You have filed your 2016 taxes with your tax preparer and are expecting a large tax refund. You may think that you are getting back free money but that is generally not the case. The IRS reports that for tax year 2015 the average tax refund was of $2,860. Many taxpayers use their large tax refund to either pay down debts, save or take a vacation. Consider this, if you are to receive a large tax refund it may be because you overpaid on taxes throughout the year.
“You are giving the IRS an interest-free loan”
When you were hired by your employer they asked you to fill out a Form W-4. The purpose of this form is for your employer to withhold the correct federal income tax from your paycheck. Do not forget to complete a new form each year if your personal or financial situation changes. You can only claim an exception from withholding if you are over the age of 65, blind, or will claim adjustments on your tax return. As your personal allowances you will make note of your spouse, dependents, and your filling status. Keep in mind the more allowances you report the less tax will be withheld from your paycheck. Make sure to use the IRS calculator to help you figure out the correct withholding. You do not want to pay taxes at the end of the year for adding too many allowances.
Avoid owing the IRS by filling out W-4 as single or married but withhold at higher rate with no allowances. Please see the following information to evaluate your withholding.
- Review Your W-4Your withholdings will be based on your salary, spouse’s earnings, tax bracket and deductions. Balance out withholding less for taxes by setting money aside to pay for any expenses you may have in the future.
- Compare Your Tax ReturnsReview last year’s tax return with the information you currently received. Pay attention to how they compare and if deductions are similar.
- Talk To Your Tax PreparerThe amount of tax to withhold will vary from one family to the next. For example, if you earn more, pay no mortgage and no kids it may be wise to withhold more taxes. If married with kids, a mortgage and make less than $100,000 due to credits and deductions you should withhold less taxes.