I’ve hung out near the water bowl a time or two. And around April 15, what I mostly witnessed was the excited pantings of dogs over “earning” big refunds from Uncle Sam because the year before they paid in to Uncle Sam more taxes than they actually owed on their annual income.
I got some news that might take the bragging right out of their tales and the wagging right out of their tails: if you’re getting a big refund, it’s not because you “earned” it. It’s because you let Uncle Sam use your money for an entire year before he gave it back to you, interest-free.
So your hefty refund – the one you’ve been waiting on to pay off your credit card balance that you ran up buying gourmet kibble, the one you’re counting on as a down payment for that shiny new collar studded with diamonds, the one you’re banking on for that once-in-a-lifetime trip to the Westminster Dog Show – that refund is no treat.
There are at least a couple of drawbacks in thinking of a tax refund as a guaranteed financial treat. First, it’s money you could have used for everyday living expenses over the year, perhaps lessening your reliance on credit and maybe even enabling you to make more money through investing. And second, the refund is never a sure thing. You can’t be positive when it will arrive. And you can’t be positive that Uncle Sam won’t audit you, meaning that you may not be due for a refund at all.
So in general, it’s not wise practice to connect any major financial decisions to receiving a huge tax refund.
Now that it is after tax day, it’s the the perfect time to assess whether you’ve already paid Uncle Sam more than you will owe him for the entire year. How can you avoid getting a huge income tax refund next year?
If you’re an employee, consider the number of dependents you claim on IRS Form W-4, Employee’s Withholding Allowance Certificate . The number of your dependents and your marital status generally dictate how much tax is withheld from each paycheck for Uncle Sam.
Let’s take me, for example. I’m single, and due to advanced surgical procedures, I’m not likely to procreate any time soon. That means that I declare that I’m single; I’m my only dependent. My buddy Rex, though, he’s a widower with pups, so he declares himself to be single, head of household, with 3 dependents plus himself.
Be sure to keep your W-4 accurate and up-to-date. Make alterations to the W-4 within 10 days after the date of a major changes in your life circumstances, such as the life or death of a dependent, or a divorce.
If you are self-employed, use the worksheet accompanying IRS Form 1040-ES, Estimated Tax for Individuals, to determine how much income tax you should submit quarterly to the IRS.
Of course, if your situation is complicated – for instance, you hold more than 1 job, or if you’re a heavy investor who regularly earns large dividends – you can always call me for an appointment to discuss the bare bones of the issue. I love chewing the fat when it comes to Uncle Sam!