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 you’ll be hit with an underpayment penalty come April 15. But by over-withholding, you’re essentially giving the government an interest-free loan.
If you ordinarily receive large tax refunds, consider withholding less and instead putting the money to work for you. 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 (at www.irs.gov ). Meanwhile, if you do get a hefty refund this year, consider these options:
- Pay down debt. Beefing up credit card and loan payments can significantly lower your long-term interest payments. The same strategy will work when paying down loans (mortgage, auto, personal, etc.)
- Boost your emergency fund. As protection against a job loss, medical emergency or other financial crisis, try to set aside enough cash to cover six to nine months of living expenses.
- Increase retirement savings. If your debt and emergency savings are under control, add to your IRA or 401(k) accounts, especially if your employer matches contributions.
- Finance education. Enroll in college courses or vocational training to gain additional skills in case you lose your job or want to change careers.
And finally, to check on the status of your refund, go to the IRS’s Where’s My Refund site. You can usually get information about your refund 24 hours after the IRS acknowledges receipt of your e-filed return, or about four weeks after filing a paper return.
