Celebrating a Big, Fat Tax Refund?

Uncle Sam just sent you a big, fat tax refund. Woo-hoo! It’s time to celebrate! Maybe a new home theatre is in your future. Or a tropical vacation. Not so fast. If you usually receive a big, fat tax refund, it simply means Uncle Sam is enjoying a big, fat, interest-free loan, courtesy of the Bank of You. Ask just about any financial advisor and he/she will tell you, a big tax refund may feel good, but as a savings plan, it ranks right up there with a spirited game of three-card monte.

According to the IRS, the U.S. government refunded over $122 billion to U.S. taxpayers in 2008, for an average refund of $2,637 per taxpayer. By February 27 of 2009, that refund total was already over $136 billion, for an average of $2,869 per taxpayer. That’s billions of dollars that could be in the personal accounts of Joe Consumer, earning interest.

It seems we Americans love our tax refunds. As each tax season approaches, we’re still feeling the spending hangover of the holiday season, and a check from Uncle Sam is a “gift” that offers just the cure. But it’s really just a placebo. It’s no gift, as the money was rightfully ours all along! Rather than receive a big refund each year, experts recommend receiving as little as possible, if anything. Sending the government a small check come April 15 is seen as the optimum circumstance.

The key to a state of tax equilibrium is the tax withholdings in your paychecks. If you haven’t looked at your withholdings lately, be aware that certain events in your life can trigger a change. These include:

• Change in employment
• Getting married/divorced
• Having a child
• Buying/selling a home
• No longer claiming a child as a dependent

To put more earnings in your pocket and less in Uncle Sam’s, you need to have less money withheld from each paycheck. To do this, you’ll have to alter your W-4 tax form to reduce withholdings. The W-4 has instructions and a worksheet to help you figure out the proper filing. Your employer can also help you with this aspect of your filing status. W-4 forms are available from your employer, or at www.irs.gov.

With reduced withholdings come increased earnings. Now’s the time to pay heed to the old saying, “Out of sight, out of mind.” Pay yourself first. Set up an automatic transfer and have that extra money in each paycheck put directly into a savings or retirement account. Since it was going to the government for so long in the form of taxes, you’ll never miss it, and you’ll be saving it for yourself. Now let’s talk about that tropical vacation!

For more information on your tax situation, check out TurboTax. You’ll find answers to frequently asked questions and free 24/7 support via e-mail, chat or phone. Plus, Vantage members can e-file simple federal returns for free, or get a 10% discount on TurboTax Online Deluxe.