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February 6, 2003

So You're Withholding, Are You?

Everyone put your party hats on: For my household, this past Saturday was Tax Return Day. And once more, it went off without a hitch.

As has become my yearly custom, I spent a single afternoon in front of my computer, and in that span of three hours or so, I got it all done.

I used to really dread completing our returns. I'd always put them off until the very beginning of April, and I'd use January, February, and March to fill myself with dread over the work that was awaiting me. But that was back when I did our 1040s by hand.

About four years ago, though, I got smart. I began spending about $30 per year on software (TaxCut Deluxe, by H&R Block; both federal and state versions) to do the work for me. The program completes both federal and state returns all at once. Every year I'm amazed, because now, doing our taxes seems way too easy.

You just get all your W-2s and other tax-related documents together, then use them to answer the questions the software asks you. Once you're done, you can let the program e-file your returns for you, and then print copies for yourself. It's simple, simple, simple.

In fact, this year, the only problem I encountered was the fact that we're due for a refund of just over $2,000 from the feds.

"How is that a problem?" my coworkers always ask. In their minds, getting back a couple thousand bucks from the IRS at tax time is the perfect scenario, year-in and year-out. I suppose they think of it as a sort of "forced" savings account. I'll admit that it's a whale of a gift − a lot of unexpected beer money, so to speak.

But that's not how I see it. I consider big tax refunds a big problem. I prefer not to loan out my money for a year and receive not a single penny in interest. I consider it a problem because the IRS compiled and used my money all year − for free − while I could've used those funds to improve my financial situation. That money could have paid down my credit card debt (residing currently at 5.9%) or my student loans (costing me something like 4.5%). Heck, that two thousand smackers would've looked really good sitting in my emergency savings accout, even.

Now all this should be an easy fix. I can just fill out out a new W-4 withholding form at work and adjust my allowances upward. Somehow, though, I've never been able to figure out just how to get that thing to add up correctly. And so my Magic Tax Withholding Allowance Number has always been a big mystery to me. But I found something this week that takes care of the problem:

I.R.S. Withholding Calculator

Plug in your numbers, and the page above will tell you the number of allowances you should claim on your W-4 to get your taxes as close to break-even as possible. And that's the way I want it. I'd prefer not to owe taxes at all, but given a choice, I'd rather owe the IRS a few hundred bucks or so every April than find out they'd been banking a bunch more of my money than they were due.

So for those of you who get sizable tax refunds each year, it might be time to reconsider your methods. Do you really want to loan your money out for free? (It is your money, after all − not the government's.) Figure how much you could do with that money if you could use as soon as it came to you. If you have debts outstanding, figure how much that refund money could save you in interest charges over the year.

Something tells me you could put your money to better use than the bureaucrats would.

Michael | February 6, 2003

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