Millions of taxpayers receive refunds each year. Will you be among
them? Most of us will happily accept our tax refund checks, because we
can usually use the money. However, it’s important to understand that
refunds actually cost you money.
Here’s why:
* The government pays no interest on refunds. Kept in your hands,
those dollars could have been productive. For example, you could have
invested the money or used it to pay off your debt during the year. If
the money had been added to a 401(k) plan, tax could have been deferred
on both the investment and its earnings. Even better, your employer
might have matched all or part of your investment, adding to your
retirement savings.
* Refunded cash is not available for use until actually received.
Even though most taxpayers get their refund checks promptly,
circumstances or errors can delay (or stop) a refund.
To manage potential tax refunds, consider reducing your withholding
or estimated tax payments. For most taxpayers, withholding must equal
either the prior-year’s tax or 90% of the current year’s liability. If
your annual income changes little, it’s relatively easy to avoid
overwithholding. You should consider filing a revised Form W-4
withholding statement with your employer if you’re having too much
withheld.
For taxpayers with fluctuating income or multiple sources of income,
the problem is more complex. The IRS provides a worksheet with Form W-4,
but many people find the form complicated. If you’d like assistance
adjusting your withholding, contact our office.
More Info: Business Accounting Systems, PC
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