Many people are excited to file their taxes because they receive a refund. Realize that a refund certainly feels better than owed money, however it also means you over paid. If your refund is several hundred dollars you may want to consider changing your income tax withholding. You can do this with the W4 form available in your HR department. When you use zero (0) on your W4 the maximum is withheld. The higher the number, the lower the withholding from your pay check.
1. You will keep more money from your paycheck each month. If you are like the average taxpayer, your refund this year is about $ 3,036, according to IRS statistics. That's a $ 253-a-month, interest-free loan you gave Uncle Sam last year. Instead, use that money all year long to make extra principal payments towards your debts . Once you are debt free, invest the extra money in ways that will further reduce your tax liability or improve your ability to earn more money; Invest for college, boost your retirement savings, or make home improvements.
2. Your goals should not hinge on the amount of your refund. Your tax refund can change significantly from year to year, depending on tax-rate changes, your eligible debts, whether you lose or change jobs or life events like a divorce or childbirth. If you routinely use your refund for something specific – like paying a tuition or insurance bill – this can be a risky practice. You really can not know for sure until you do your taxes and determine the amount of your refund, or if you will even get one. Monitor your withholding each month and adjust the W4 if your situation changes.
3. You are not at risk for refund delays. Although it is somewhat unusual, several States that have been hit hard by the recession are temporarily freezing tax refund payouts in 2010 (especially those with income taxes, which may be down due to job losses). Do not be one of the folks whose money is tied up by state cash-flow problems. You are not required to give this interest free loan to the State!
By understanding your current financial situation and making financial changes you will be in a strong position to improve your financial situation. Imagine a day in the future, when you look back at reading this article as the beginning of your financial independence.