Surely there is no one who would prefer to PAY the IRS at tax time, so it’s better to get the refund. With some careful adjustments, however, you can reduce the size of the refund and see more in your check throughout the year (without danger of having to pay at tax time).

Visit your human resources or accounting department at your place of employment. Ask to look at your w-4 to see what your withholdings are. If you’re getting a large refund, you can increase the number of withholding allowances you claim. The payroll people should be able to help you find the break-even point; and show you how much more you would get in each paycheck throughout the year rather than waiting to get it all at tax time.

You have a few choices as far as what to do with the extra money changing your withholdings would cause in your paycheck:

Automatic debt repayment: If you are looking to pay off credit card bills or other debts, the best thing you could do is set up automatic payments to your highest interest account each pay period, for the amount of extra money that will be in your paycheck. You won’t miss the money since you hadn’t been receiving it before, but those small extra payments will do wonders to paying off the credit card bill faster. If you do this, you will want to continue sending your normal monthly payment as well.

Automatic savings: If you’re not in very much debt, or can get a high interest rate on savings (higher than the interest you pay towards debt), you may decide it makes more sense to put the extra money into a savings account. Each pay period, automatically transfer the extra money into the savings account of your choice. This way, you earn interest on the money all year round instead of letting the IRS hold on to it for you interest-free. Also, if you should miscalculate your break-even point with your taxes the first time you make a change to your withholdings, you will have the money in your savings account available to pay for it.

If you’re not convinced that it’s more valuable to receive the money throughout the year rather than in one lump sum at tax time, leave everything as it is except for what you do with the refund when you get it! Often, people use the refund to take a vacation, make a down payment on a vehicle, or deposit it into their bank accounts to slowly whittle away on purchases here and there. A better method, for people in debt, is to take the refund and apply it to your highest interest debt, to pay it down faster. Do this every year until you are debt free; and then you can use the refund for the fun purchases – like vacations or cars, without guilt!

by: Debbie Dragon