Saturday, May 20, 2000
Personal Finance
Don't be proud of tax refund
Are you among the 90 million of us proudly getting an income tax refund? Perhaps you shouldn't be proud of it.
The IRS says the average refund is $1,551, but it could be worth much more had it been in your pocket a year ago instead of in the mail now. Just imagine if it had been earning interest all this time.
That money coming to you isn't a gift from the government. It's your money that you have loaned to the government — interest-free — bit by bit during the last year.
“A big refund means you've overpaid your taxes, and that just doesn't make financial sense,” said Mark Luscombe, principal federal tax analyst for tax information publisher CCH Inc.
A survey by H&R Block says most of us use tax refunds to pay bills, add to savings, make a major purchase or invest. But if you had the money in hand through the year, you wouldn't need to wait for the refund to begin with.
Withhold less
Why pay more than you have to? Don't. Instead, put that money to work for you.
Start by visiting your human resources department and asking to file another W-4. This is the form that determines how much tax is withheld. The magic number on the form is your allowances. Remember: The higher the allowances, the less tax paid.
The form and its magic number are supposed to take into account personal exemptions and deductions that you're entitled to when you file your 1040 — but few of us adjust our withholding when our circumstances change and deductions increase, such as buying a house.
Allowances on a W-4 are not the same as personal exemptions on the 1040, and they don't have to be equal. Allowances are supposed to be based on exemptions, but they don't account for extra itemized deductions. Therefore, when you have a lot of deductions on a 1040 that are not reflected in your W-4 allowances, you have too much tax withheld.
The W-4 worksheet can help you figure what your allowances should be to compensate for those extra deductions. It can get confusing, so I'll repeat: The higher the allowances, the less tax is withheld and the more money in your pocket.
A better way to save
“But I like being forced to save,” you say.
Saving is good, but there's a better way. If you haven't maximized your 401(k) contribution, do it now. The money that was going to the government can then go into your retirement account — growing as it should, and still out of sight. If you have maxed your 401(k) or can't establish one, look into an IRA or a Roth IRA. Some brokerages have electronic-transfer options, where again the money can be taken and invested on a regular basis and be like forced savings.
Refunds sound snazzy, but remember: It was your money all along. Use it wisely.
Amy Higgins writes about personal finance for the Enquirer. You can reach her at 768-8373; ahiggins@enquirer.com; or Your Money, The Cincinnati Enquirer, 312 Elm St., Cincinnati, OH 45202.
Federated outlines priorities
Shareholders approve doubling of maximum incentives for execs
Tristate stays true to Fidelity
Glossary of mutual fund terms
Trade law may aid Chiquita in Europe
Psychic gives stock advice
Don't be proud of tax refund
Savvy Strategies
The Sophisticated Investor
Trade gap hits record
Need phony ID? It's just a download away
Tristate Business Summary
What's the Buzz?
Newest e-mail virus contained
