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. This means that these taxpayers withhold too much in 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, such as credit card bills where interest rates hover around 18% per year?
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 give to the IRS interest free with each paycheck. Is the new W-4 making it difficult to plan this out properly? Here is the answer: our free PAYucator can help you estimate and plan your tax withholding.
Fact Two: A tax refund is the result of poor or failed financial planning on your part. The tax refund is made up of your over-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 the PAYucator! When you submit this without any information, your employer simply uses your filing status and standard deduction amount to determine how much to withhold per pay period. Generally, the amount is over-estimated so you do not owe taxes and does not take into consideration your dependents or other income. Often, it is too much and you receive it back as a refund after giving your money away as a loan.
- 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 change 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, may be 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 is a bit like driving a car looking only at the rear-view mirror. Estimate your next tax return while you are using the eFile.com PAYucator. To stop tax penalizing yourself and to keep your hard earned money during the year, 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?
- Use the PAYucator when you complete your W-4.
- Assess, plan your tax withholding.
- Use the 2021 tax return 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.
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.
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