Self Imposed Tax Refund Penalty
Recent IRS statistics show that almost 100 million (or 75%) of all Americans get a tax refund check, and the average refund check is about $2,800. That means, that these tax payers withhold too many taxes with each paycheck. Every month, these taxpayers hand over about $233 of their hard earned money only to get it back at Tax Return time as a Tax Refund. What if you saved this money or paid off bills - for example credit card bills where interest rates hover around 18% per year?
Do You Penalize Yourself, Financially?
Fact One: The Tax Refund money you get in April after you filed your tax return is your own money that you give to the IRS interest free with each paycheck.
Fact Two: A Tax Refund is the result of poor or failed financial planning on your part.
Fact Three: The W-4 (or W-4 worksheet) you completed and submitted to your employer is not equipped to help you in balancing your taxes.
- Let's say you receive a $2,400 tax refund after you submitted your tax return. On average, you are asking your employer to withhold $200 in too much tax withholding each month (or $100 each biweekly pay period). Since we don't know your tax specifics, simply adjust your W-4 and reduce the number of Allowances by one and see by how much your tax withholding changes on your next paycheck. If it did not reduce it in this case by $200 add another Allowance and do this until you are balanced.
- In comparison, you could use this money to pay off $2,100 in credit card debt at 18% per year interest in 12 months. As a result, the $200/month would have worked for you instead of the IRS. If you do not pursue this strategy, you would effectively penalize yourself at 18% per year.
How To Balance Your Tax Refund, Taxes
To stop tax penalizing yourself and to keep your hard earned money, we recommend you review, assess and take action:
- What is the W-4 and Tax Withholding?
- Did you claim all your Tax Refunds over time?
- Assess, plan your Tax Withholding
- Use the W-4 Tax Withholding Calculator
- Complete the W-4 online and submit it
Need more help in self tax penalty prevention? Contact an eFile.com Taxgeek to discuss your tax planning strategy.
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Fail to Plan is Plan to Fail - don't let that happen to you.
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