People are starting to file their 2014 taxes, and Uncle Sam will soon send out millions of checks. It’s astounding that the average federal tax refund is around $3,000. Why do folks give interest free loans to the government in the form of over-withholding?
There are several reasons: Some folks are afraid of the IRS and don’t want to owe them anything. Others look at a big refund as “free” money, or a windfall. While some realize that they’re not good savers, and they view this as an effective way to force themselves to save.
Using the refund as a means of forcing yourself to save is a legitimate reason to over-withhold. But if you’re afraid to owe the IRS even a penny or you’re wanting to blow a windfall, it’s actually poor stewardship. You can put that money to better use than the government by using the withholding throughout the year to pay down those high interest rate credit cards or to beef up your saving or give to the work of Christ.
Ideally, you want to get back very little from the IRS, and now’s the time to make changes to accomplish this. First, adjust your withholding so that the minimum necessary amount is taken out to cover your tax liability. The IRS has an excellent Website. Go to www.irs.gov and download Publication 919 for help on calculating the right amount to withhold.
Then, plan ahead. Are there things that will lower your tax liability next year by providing more credits and deductions? Having a child, buying a house with a mortgage, investing in a retirement account, and giving more to your church and ministries may all reduce your tax bite.
Or are there things that will increase your tax bill, such as, withdrawing money from a tax-deferred retirement plan or one of your children leaving the nest to become self-supporting. You’ll need more withheld from your paycheck if any of those things happen.
Listen to the Compass radio programs MoneyWise and HeyHoward to learn what God says about handling money.