Life Times Newsletter

Winter 2005
Vol. 7, No. 1

Anticipating a tax refund? Don’t celebrate!

Sandra McKinnon, MS
Consumer & Family Economics Specialist

The IRS reports Federal tax refunds to individuals totaled more than $202 billion in 2003. Nearly 100 million taxpayers got refunds (three out of four returns). The average refund was slightly more than $2,000.

A tax refund isn’t as much cause for celebration as many think. A refund means you paid too much in taxes during the year. In case you didn’t notice, Uncle Sam didn’t pay any interest back while he held your extra money either. Although many people consider a refund “found” money or a forced savings plan, you are giving the government an interest-free loan if you get a tax refund. Some won’t even do that for their relatives.

A tax refund is money you earned and that you could have accessed throughout the year. For example, say you receive a $2000 refund. If you adjust your withholding, you could have an extra $166.66 each month available to you to spend, start an emergency fund, invest, or use to pay down debt.

Here’s a rule of thumb: If you receive a refund over $500, or owe more than 10 percent of your total tax bill, you should adjust your withholding.

For most taxpayers, withholding can be adjusted by modifying the number of allowances claimed on your W-4 (the form you file with your employer when you begin employment). Most people fill it out and never see or think about it again, but you can change your number of allowances at any time (altering the amount of taxes withheld from your paycheck). The more allowances you claim, the less tax is withheld. Your goal is to have withheld at least 90 percent of what you think you’ll owe for a year. The W-4 worksheet helps you attain that goal.

Give yourself a gift in 2005:  Use more of the money you earn by adjusting your withholding. According to Dr. Mark Oleson, director of the Iowa State University Financial Counseling Clinic, there are three steps to follow:

STEP 1 – Anticipate changes.  Anything that lowers your tax bill (tax credits, exemptions, deductions, etc.) can be considered in your allowance calculation. Did you get married? Divorced? Have a child? Purchase a new home? Refinance a current mortgage? Earn more/less money than last year? Begin paying your student loans? Capital losses? Ask yourself questions that will determine if it makes sense to alter your allowances, even if you didn’t get a large refund, because your situation may be different from last year.

STEP 2 – Use a withholding calculator.  The simplest way to check the accuracy of your number of withholdings is by accessing the Missouri Department of Revenue’s online withholding calculator at  Employees can use it to do tax planning and project future withholdings and changes to their Missouri and/or Federal W-4. Another option is to do it “the old-fashioned way.” The IRS Publication 919 (How Do I Adjust My Tax Withholding?, available at ) contains all necessary worksheets and instructions to walk you through calculations on your own.

STEP 3 – Take action.  If you are in a situation where altering your W-4 would be beneficial, do it! You can simply download a new W-4 ( ), fill it out and turn it into your human resource office.

For more information about saving, investing, or paying down debt, visit the Missouri Saves website .


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University of Missouri Extension Editor: Roxanne T. Miller