OK guys it’s that time of the year where some of you have received or will be receiving your W-2s in a couple of weeks. If you are one of those that get back $1-$3,000 thousand dollar plus tax refunds this post is for you.
Many people think that by having the most amount withheld to get the largest refund possible is a good idea. This is not good because what you are doing is giving out a loan at 0% interest. Now unless you are paying on a loan from a gracious family member, you are paying way more than 0% interest. On a $1,000 refund means you are having $80 more or less too much a month that is being withheld out of your check. That’s money you could be funding your emergency fund with while making compound interest work FOR YOU or pay down high interest debt. With the rates still being as pitiful as they are, it’s still $2+ dollars more than what you had. There are tools on the Internet that will help you figure out what your withholding number should be. Also MS Money Deluxe, Quicken Deluxe or whatever the mid to higher level program selection has this as part of the program for those that use financial software. While the goal is to break even it is a bit hard to achieve so you want to keep that number as low as possible.
Though it’s too late to do anything about tax year 2009 you can do this for 2010 and beyond.