If you live in the US, today is the day your personal taxes are due. It is also a good time to take a look and consider whether or not you got a refund. If you got more than a couple hundred dollars back beyond the economic stimulus payment, it is a sign you need to adjust your deductions. Don’t get excited when you get money back. It simply means you’ve over paid and gave the government an interest free loan. Your HR department should be able to help you readjust your deductions.
I’m not great with money, but I’ve been getting better this year. I’ve generally thought of my refund as an easy way to save money (by letting the government use it for a year, of course), but you make a good point: that loan is interest-free, while I could be making money on it in a savings account all year before I pay Uncle Sam.
Any thoughts on how I could do this better? I’d be interested in an auto-deposit to my savings account if I knew how much I’d have to pay at the end of the year, but I have no idea how to figure out that amount.
If your salary next year will be about the same as this year, you can adjust things so you pay the amount that was actually due this year. That is an easy way to do it. The money still gets taken out on a regular basis, but at the end of the year you have paid only what you need to.
What you don’t want to do is not pay any taxes and then just send it in with your tax return. Based on my understanding of tax law, if you don’t prepay 90% of your liability for 2008 you could end up paying a penalty. If in 2008 you prepay at least as much as you owed in 2007 you will be ok as well.
A loophole is that the prepayment doesn’t have to be done over the entire year. You can have very little taken out at the beginning of the year and then a lot take out at the end. This can be a little tricky and you may be better off having it take out in even amounts over the year. Generally if you talk to someone in your payroll department and explain that you want to minimize your refund, they may be able to help you adjust your exemptions accordingly.
Regardless it is good to set aside the money you may need to pay taxes when it is due.
Makes sense; thanks for the explanation. I’ll talk to my payroll guy. :)
Something else that might or might not apply to your situation. Your ‘refund’ gets taxed as income on next year’s taxes whereas a payment counts as a tax deduction.
At least, that’s how I understood it while I was going through Turbo Tax.