Many taxpayers like to receive an income tax refund each year. But before you give Uncle Sam an interest-free loan, consider your other options. 415 Group Principal Kathy Krohn, CPA, shares her insight:
Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money.
Fortunately, there is a way to begin collecting your 2017 refund now: You can review the amounts you’re having withheld and/or what estimated tax payments you’re making, and adjust them to keep more money in your pocket during the year.
Reasons to modify amounts
It’s particularly important to check your withholding and/or estimated tax payments if:
You received an especially large 2016 refund,
You’ve gotten married or divorced or added a dependent,
You’ve purchased a home,
You’ve started or lost a job, or
Your investment income has changed significantly.
Even if you haven’t encountered any major life changes during the past year, changes in the tax law may affect withholding levels, making it worthwhile to double-check your withholding or estimated tax payments.
Making a change
You can modify your withholding at any time during the year, or even several times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can make adjustments each time quarterly payments are due.
While reducing withholdings or estimated tax payments will, indeed, put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax during the year, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the April 2018 deadline.
If you’d like help determining what your withholding or estimated tax payments should be for the rest of the year, please contact us. © 2017
“Some people like to receive a large tax refund at the end of the year, while others like to pay the minimum amount necessary to avoid penalties. Everyone does it for different reasons, so it really depends on the individual’s comfort level.
It’s good to review your withholdings each year when you file your tax return or after any major life changes, such as getting married, having a child, changing jobs or buying a house.
If you decide to make an adjustment, you can alter your scheduled estimated tax payments or change your payroll withholding amounts. But be cautious when completing your Form W-4 - these forms can be misleading. If you follow the form, it may talk you into additional exemptions where you don’t need them. You need to understand the terms and what they mean.
When in doubt, give us a call. At 415 Group, we can run projections, so you have a better idea of where you’re going to be at the end of the year based on current income and projected income.”