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Last year the IRS doled out over 110 million income tax refunds averaging $2,803. Another way to look at it is that collectively, Americans overpaid their taxes by nearly $310 billion in 2012.
Part of that is understandable: If you don’t have enough tax withheld throughout the year through payroll deductions or quarterly estimated tax payments, you’ll be hit with an underpayment penalty come April 15. But the flip side is that by over-withholding, you’re essentially giving the government an interest-free loan throughout the year.
If you ordinarily receive large tax refunds, consider withholding less and instead putting the money to work for you, by either saving or investing a comparable amount throughout the year, or using it to pay down debt. Your goal should be to receive little or no refund.
Ask your employer for a new W-4 form and recalculate your withholding allowance using the IRS’ Withholding Calculator (irs.gov).
This is also a good idea whenever your pay or family situation changes significantly (e.g., pay increase, marriage, divorce, new child, etc.) IRS Publication 919 can guide you through the decision-making process.
Meanwhile, if you do get a hefty refund this year, before blowing it all on something you really don’t need, consider these options:
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