If you’re like me, you file your taxes as early as possible because you’re expecting a huge refund check from the IRS. It’s like getting a bonus!
But in reality, it’s only a bonus in a psychological sense because the refund is money that you already earned, but the IRS is just ‘returning’ to you because they withheld too much from your paychecks.
So if you’re paying too much in taxes from your paychecks, and getting a refund in April or May of the following year, why not consider having the IRS withhold less from your paychecks? (Especially now that you’ve seen the payroll tax take a bite out of your paychecks in 2013) By withholding less tax from your pay, you will see a higher after-tax paycheck throughout the year – it’s like getting your refund months in advance! Similarly, if you find that you’re always writing big checks to the IRS during tax season, consider using the IRS Withholding Calculator. Just have your most recent paystub and tax return handy, and answer the questions as best as you can. The calculator can help you determine whether you need to fill out a new W-4 Form to give to your employer, so that you don’t have too much or too little withheld from your paychecks.
I tried using the calculator myself in the beginning of 2012
and changed my W-4 Form to reflect the results from the calculator. I was a bit
surprised at how accurate it was – I basically had the correct amount withheld
from my paychecks, with no refund. I was a little disappointed since it was the first time I didn't receive a tax refund, but felt comforted to know that we got our "refund" in advance through higher paychecks in 2012.
You’ll have to look at your own financial situation to see if it makes sense to forgo the refund check during tax time and have less withheld from your paychecks instead. Some families use the refund check as a savings tool and either put it in their bank account, or spend it on vacation or remodeling their home. However, if you find a way to be disciplined, you can have less in taxes withheld from your paychecks and save part of each paycheck or even invest it so that it grows, which the IRS doesn’t do for you when they are temporarily holding your money until you file for a refund. Also, if you expect to spend more due to life events such as having a child or if you expect lower income, it might make sense to receive a higher paycheck so the money is available for you when you need it.
It doesn't hurt to give it a try. If you want next year’s tax refund now or if you don’t want to write a big check to the IRS every year, check out the IRS Withholding Calculator.