Are You Overpaying Your Taxes?

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/article/0,,id=96196,00.html).

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."

She's right, of course. You've come to count on that little windfall once a year, but wouldn't you rather have some extra each month to save for retirement, or pay down debt, or just make ends meet? So let's not put it off anymore. Tomorrow, when you go into work, go straight to your human resources manager (or your boss, if you work for a small company) and ask that he or she help you adjust your withholding. Then, stay on top of it, because many of life's milestones call for another look at your W-4, including marriage, divorce, a second job, birth of a child, the purchase of a home, capital gains and retirement.

Gimme My Money

Jean Chatzky, host of “Oprah and Friends” radio, wrote up a blog on the tax advice I recently offered on her show. You can find the full post and other great posts on her financial blog, here.

This morning, tax expert Roni Deutch was a guest on my radio show. First, I need to know what that woman eats for breakfast. She is a bundle of energy on a subject that puts way too many people to sleep. But she made a really important point about tax refunds. If you’re among the Americans who receives one each and every year — and tax refunds have been running, on average, about $2400 for the past few years — or even if you simply got one last year, I want you to think about changing your withholding. Here’s why: When you get a tax refund, that means you’ve been giving the government an interest-free loan.

As if that weren’t bad enough, this year some states have intimated they aren’t going to be giving you your money back — at least not right away. Kansas. Arizona. California. All have delayed the processing of tax refunds, again YOUR money, as a solution to their cash flow problems. And in other states, including New York, where governments have said this is not happening, we have started to see some anecdotal reports that refunds are slowing down.

So what do you do? Sit down with the payroll department at your company and adjust your withholding. If you get a tax refund you want to increase the number of dependents you are taking. The key is not to owe Uncle Sam at the end of the year, but to break even. Particularly when Uncle Sam is so poor, he wants to hang onto your green.