Self Imposed Tax Refund Penalty
The latest IRS statistics1) show that around 113 million of all tax returns filed got a tax refund check and the average refund check is about $2,900: A tax refund is most of the time not free government money as too many taxpayers incorrectly assume!
There are more 2021 tax returns with a certain amount of income, filing status and number of dependents that have $0 per paycheck IRS tax withholding and do receive a tax refund, mostly due to the increase and refundable Child Tax Credit and other Tax Credits. Review this chart for guidance on $0 paycheck tax withholding.
This means that most 77% of all taxpayers withheld too much of their money in taxes per paycheck.
Every month, these taxpayers hand over on average about $241 of their hard earned money to the IRS - mostly based on the form W-4 - only to get back this same money at tax return time in form of a tax refund based on the tax return. The IRS merely processes the tax withholding and tax return. In other words, if a taxpayer withheld $241 in January of any given year, this taxpayer would have to wait over a year to get back this money via a tax return refund. To make matters worse, during the years 2020 and 2021 the IRS processed tax returns considerably slower due to the coronavirus crisis and the processing of stimulus payments etc. As a result, taxpayers waited in many cases over 18 months to get back their "oversized" paycheck tax withholding in form of a delayed tax refund.
Do you Penalize Yourself Financially Through Taxes?
Fact One: The tax refund money you get in tax season after you filed your tax return is your own money that you gave to the IRS interest free with each as a result of your W-4 or tax withholding plan. Granted, the new W-4 is complicated and makes if difficult for most taxpayers to plan for paycheck based IRS tax withholding. As a result, we at eFile.com have created 3 options to better plan, calculate and create W-4 forms.
Fact Two: A tax refund is the result of failed W-4 related financial planning on your part. We understand that the W-4 form has gotten way more complicated and this is why we have 4 easy to use W-4 tools to help you with this! The tax refund is made up of your over-tax withholding plus refundable tax credits. Taxpayers are eligible for various tax credits, some of which may be direct payments to you that can only be claimed by filing a tax return. Not sure which tax credits you qualify for? Prepare your return with eFile.com! We will select all the credits and determine the maximum amounts you are entitled to and include them on your return.
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. One more time, use any of these W-4 form tools and be guided through the process. When you submit the a W-4 without proper planning to your employer, the payroll department will simply use your filing status and standard deduction amount to determine how much to withhold per pay period. Generally, the amount is over-estimated that results in a tax refund as one W-4 does not take into consideration other important factors. A tax refund is a free loan you give the IRS only to get it back with interest as a tax refund! Consider this example -
- 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 dollar amount withheld per paycheck and see how much your tax withholding changes on your next paycheck. If it did not reduce it in this case by $200, consider reducing more 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.
- Tax withholding is dependent on the specific tax situation. The general idea here is to reduce your paycheck withholding so that you are as close to balanced as possible without owing. You may consider the inclusion of tax credits you may be eligible for, but it is best to look at your income and withholding separately. Tax credits are included as you prepare your return and are subject to changes each year with the tax code. For example, you may qualify for the Earned Income Tax Credit one year but, due to a pay raise, you may no longer qualify next year. As such, you would not want to consider this amount when figuring your taxes for the following year.
How to Balance your Tax Refund, Taxes
Tip: Completing a W-4 without planning out your next tax refund (or at least base it on your previous tax return) is a bit like driving a car looking only at the rear-view mirror. Estimate your next tax return and create your W-4 all at the same time! Stop tax penalizing yourself and keep your hard earned money during the year, we recommend you review, assess, and take action with these steps:
- What is the W-4 and tax withholding?
- Did you claim all your tax refunds over time?
- Use one of these W-4 tools and get sowing!
Need more help in self tax penalty prevention? Contact an eFile.com Taxgeek to discuss your tax planning strategy.
Fail to Plan is Plan to Fail - don't let that happen to you! View a list of stupid and smart things to consider when preparing a tax return! During the year, it may be beneficial to start thinking about your tax return even if the filing date may seem far away. See ways to save money during the year as well as some tips to save you money on your taxes.
Why stress over IT? IT = Income Taxes and we make IT easy for you! On eFile.com, you can answer simple tax questions, enter figures from the tax forms you receive, and the eFile Tax App will report all your information on the proper forms with 100% accurate amounts. e-Filing is secure, quick, and saves you the hassle of filling out forms and mailing them to various tax agencies.
After all this tax-stress, relax and listen to the eFile Song and sign up to TaxWin.
1) IRS Income Tax Return Statistics released in 2021
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