Cut Your Tax Refund and Have Money for Bills

You know that nice fat tax refund that you just got? If you are serious about getting a handle on your finances and paying off some debt, like high interest credit cards, it has to go.  This seems like the last resort for those who are struggling, but really, it should be something that you look at every year in order to adjust it as needed.

If owing the IRS money is the worst, then paying them every month to hold your money only to withdraw it with no interest is a close second.  That is essentially what you are doing when your withholdings are wrong.

The philosophy used to be that you would rather have money coming back than going out on April 15th.  And, while that mindset is understandable, it is wrong if you are in debt and need to get out.

If you still have a job, then go to your employer and see what your withholdings are via your W-4 form.  If you have a lot of money which comes back on your tax refund check, then you need to increase your withholding allowances.  Consult with your payroll department so that they can show you the impact on your weekly check.  Strive to break even with the government every April 15.

Talk To Your Tax Preparer.  If you have someone who does your taxes, talk to them as well.  This is because when you talk to your employer, you only take into account your income and not your spouse.  Someone who is a professional will look over the complete picture in order to make the best recommendation.

What To Do With That Money?  Let us assume that you are going to be getting more money in your check every week because too much was being withheld, and you now want to shoot for a ‘break-even’ situation.  You could potentially end up with another $20 or $30 in your check every week.

Pay Down Debt.  Use the extra in your check to eliminate some debt, preferably the loans and accounts that are costing you the most money.  This little bit of extra money each week amounts to a payment of about $80 which will go far for you, especially if you add it to what you are already doing.

Automatically Save.  If your debt is in good shape, put this money to work in the form of a high-interest savings account.  Set it up so that the money is automatically deducted from your check and deposited into this new account.  You’ll never miss the money if you didn’t see it in the first place.

Use Savings to Pay Any Taxes Due.  If you choose the savings account option, then keep it into an account that will allow you to get to the money when tax time comes around so that if you do owe some money to the IRS at tax time, you will have it available to you.

Review Your Tax Withholdings Every Year.  If you have had a major life-change during the year such as a marriage, purchase of a house or even the birth of a child, you should review your withholdings and make adjustments as needed.

There are Internet based calculators that will help you determine how many allowances that you should be claiming.  You can use one at the IRS’ own webpage here.  Or consult with your tax preparer for more personal service.  Whichever route you choose, take control of your taxes and put your money to work for you in helping you cut the amount of taxes you pay every year.

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This entry was posted on Wednesday, May 6th, 2009 at 3:35 pm and is filed under Debt & Consolidation, Tips & Advice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.