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Tax refunds are bad news

Make your money work for you, not Uncle Sam

(Article from Money magazine, June 2005, by Tara Kalwarski)

When you get your tax refund, the instinctive reaction is, "Hey, free money!" But you know better: A refund means the federal government got to hang on to your dough for a whole year and is now paying you back - without interest. Nearly 80% of U.S. taxpayers are in that boat. Last year the IRS sent out more than $215 billion in tax refunds, average $2,126 per check. But it's easy to avoid giving the IRS any more than you legally owe.

Keep more of your paycheck
You can reduce next April's tax refund by using the IRS' online W-4 calculator at irs.gov to determine how much you'll probably owe for 2005. (Make sure you have some recent pay stubs and last year's tax return handy.) USAA financial planner Carey Rokovich says the calculator can estimate your tax bill to within $100. If it looks like the Treasury will owe you money, trim the amount of tax being withheld from your paycheck by increasing the number of allowances (or you can just specify an additional dollar amount that should not be withheld from each paycheck - use a minus sign in front of the number). (If you have a refund coming for 2004, you can also use the IRS site to find out when you should be receiving it.)

Other resources
The IRS site can be a handy tool. But if you are self-employed - or if there's a chance you will be hit by the dreaded alternative minimum tax - skip the calculator and instead check with IRS Publication 919 or an accountant.