Lessons We Learned This Tax Season: Why You Don’t Really Want a Tax Refund

April 16th, 2012 - By P.S. Jones

As this year’s tax deadline has arrived, many of you have already filed your personal income taxes for 2011. Some of you even filed extra early because you had a big refund coming. But here’s something you should remember about tax refunds: if you’re getting a refund, you’re probably doing something wrong.

Here’s the way your income taxes work. When you start a job, you fill out a W-9 tax form that tells your employer how much you’d like him to withhold from your paychecks to send the IRS in anticipation of your tax obligation. When you file your income taxes the next spring, the IRS compares what you actually owe to what you’ve already paid through paycheck withholding. You only get a refund if you paid too much.

Of course, getting money back is obviously better than owing money. But a tax refund isn’t a bonus. It’s the money you overpaid. It’s just that you’ve essentially allowed the government to hold onto that money all year. They didn’t pay you interest on it. They didn’t give you a nice card. They didn’t even say thank you. They just sent you a check like they’ve done you some sort of favor.

Now some people can’t save any other way or just prefer to receive this money in one big lump sum every year. But if you’re someone who doesn’t need the government to hold your money all year and then hand it back to you when they’re ready, you don’t really want a tax refund. Instead, you could use that extra money to live on throughout the year. Or you could invest it and earn money on it. If that sounds better to you, you should fill out your W-9 tax form in a way that limits the amount your employer takes out of your paycheck so that you’re about even at the end of the year.

Fortunately, the IRS has an online withholding calculator to help you figure out how much you should be sending in from your checks. Using it, you can adjust your W-9 tax form so that you’re paying just what you owe instead of overpaying.

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  • ScoutF

    W-4 not W-9

    • TT

      OMG thank you. That just blew my mind how they posted this without doing the proper research and double checking what they were posting. W-9′s are for contract workers.

      • ScoutF

        anytime :)

  • Lalatarea

    i agree i know ppl who purposely choose to have the most taken out cuz they want that big refund but what good is that money you don’t get for a year gonna do you when u got bills now? simple calculations will let u know how much ur taxes will be and like the author said use that money to make u money and save it with interest.

  • FromUR2UB

    Please.  Getting my own money handed back to me is better than paying.  I wait until the last day to mail my money off, so I guess that makes us even.

  • http://www.rishona.net/ Shona

    Unless you have your situation reviewed by a tax professional, I think it’s better to be safe than sorry. Anywhere from $500-$1,000 of my refund comes from tax credits (student loan expenses, charitable donations, medical expenses, etc.) which are not only tough to project, but are subject to yearly changes in the tax code. In addition, I’ve had situations where I’ve been laid off, and that “extra” that I paid in came in handy when picking up 1099 (contract) work where taxes are not automatically deducted.

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