What Is A 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 $2,400. Every month, most taxpayers pay an average of $200 too much in income taxes.
You Might Penalize Yourself With Your Large Tax Refund
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.
How To Tax Penalize Yourself
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 withholdings each month (or $100 each biweekly pay period).
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.
As a result, if you do not pursue this strategy, you would effectively penalize yourself at 18% per year.
How To Balance Your Tax Refund
To stop tax penalizing yourself, we recommend that you complete the following tasks:
1. Check and Update Your Paycheck Withholding with Form W-4
A W-4 is a tax form that you complete and give to your employer (not the IRS) to inform them how much federal and/or state tax you wish to have withheld each pay period. To get more money in your paycheck, you may want to increase your allowances (number of withholdings) by 1 or 2. Make sure you do not claim too many allowances or you will end up owing taxes at the end of the year for not have enough money withheld.
Use our Tax Withholding Assessment Tool to determine whether or not you need to update your paycheck tax withholdings.
2. Use the eFile.com Free Tax Calculator to Estimate Your Taxes
Where can you find your estimated income? If your income has not changed from last year, simply begin by entering the information from last year's W-2 into the eFile.com Free Tax Calculator. Alternatively, you can use the year-to-date income from your latest pay stub to estimate your expected annual income for the year (keep in mind that the calculator is based on currently available figures which may be subject to adjustment).
If you need more help in self tax penalty prevention, contact an eFile.com Taxpert to discuss your tax planning strategy.
Need a break from taxes? See our list of stupid and smart things to consider when preparing a tax return!