How to Put Next Year’s Tax Refund to Work for You Right Now

by RC on May 29, 2008

tax_refund_check.jpgDid you get a large tax refund last year?

Did you like getting a tax refund if you did?

While it was probably nice to receive a “windfall”, if you are still in debt or not saving enough for retirement, wouldn’t you rather have next year’s money now, to pay off debt at a high interest rate or to save for retirement by opening a Roth IRA, or save it in a high interest savings account? More than two-thirds of tax filers get a refund every year, with an average refund of over $2000. That’s almost $200/month that could be in your pocket now, if your refund was about average. I got a tax refund this past year, and although it was nice, I am changing my tax withholding to minimize the size of the refund I get next year. Look at it this way: If you have credit card debt at 15%, not only are you paying the credit card interest rate on that money when you could be paying off the amount this year , but you are losing an additional few percent to inflation.

If you do owe credit card debt or don’t have the money to open a Roth IRA, or just want to be in control of your own money, you should really consider changing your tax withholding by increasing the number of exemptions on your W-4 . Estimate the number of exemptions you should have on your W-4 by using the IRS Withholding Calculator on the IRS website.
Tips For Using The Program

  • Have your most recent pay stubs handy.
  • Have your most recent income tax return handy.
  • Fill in all information that applies to your situation.
  • Estimate values if necessary, remembering that the results can only be as accurate as the input you provide.
  • Consult the information links embedded in the program whenever you have a question.
  • Print out the final screen that summarizes your input and the results, then use it to complete a new Form W-4 (if necessary), and keep it for your records.

While it’s easy to look at getting a substantial tax refund every year as forced savings, I am sure you can come up with better uses for that money now. If not, change your withholding anyway, set up a direct debit from an online savings account such as ingdirect, and force yourself to save.

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