Jean Chatzky of Oprah.com recently posted a great blog discussing taxpayers who overpay their taxes, why, and how to avoid doing so. You can find a snippet of the post below, but the full story can be read on her blog.
At this point, you might be done with your taxes. If you haven't yet dropped your envelope in the mail—or clicked the button to e-file, which is the faster method—I hope you've at least gotten the ball rolling.
But it's not too early to start thinking about next year, particularly if you have a hefty refund coming to you from 2008. I know—getting a burst of money at once is exciting, particularly in this down and out economy, but financially speaking, it's just not smart.
When you get a tax refund, you're giving the IRS a free loan for an entire year, a year that you could have had that cash stashed in an interest-baring account, where it would have been working for you, not Uncle Sam. Not only that, but this year, because of budget trouble, some states, including California and Kansas, have had delays getting refunds out. "In California, this went back to January, so filing early wouldn't have helped. Truthfully, this is speaks more to being careful in your withholding," says Sherrill Gregory, an enrolled agent in California.
The idea, of course, is to configure your withholding on your W-4 so that the amount that is withheld from your paycheck each month more or less matches your estimated tax liability. That way, come April 15 of the following year, you don't get a refund, but you also don't owe. A good way to run your numbers is by using the Withholding Calculator on the IRS website (www.irs.gov/individuals/
Even if you've been with the same employer for years, it's not too late to make a change, says Roni Deutch, author of The Tax Lady's Guide to Beating the IRS. "You can adjust your withholding any day of the year. But the longer you fail to adjust it, the longer you're going to be addicted to getting that refund check in April."