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Give yourself an end-of-year pay raise

Are you one of the millions of taxpayers who plans each year for an IRS refund? It might be time to change your plans.

As noted a couple of days ago (here), the IRS is threatening to delay the start of the 2008 filing season if Congress doesn't get its act together and pass legislation to take care of the alternative minimum tax.

That would mean that the AMT, which could cost an estimated 19 million mostly middle-class taxpayers more this coming filing season, will cause problems for many, many more folks who aren't directly affected by the parallel tax system.

Taxrefundcheck_2 The unintended victims are taxpayers who intentionally have taxes over withheld from their paychecks throughout the year so that they'll get a big refund check.

And there are a lot of such taxpayers. According to IRS figures, in 2007 more than 103 million taxpayers received refunds; that's 76 percent of taxpayers getting money back, with the average check coming to almost $2,300.

Those folks, on average, could have been pocketing an extra $191 a month. Instead, they willingly handed it over to the IRS.

I suspect a good many of these refund recipients also whine and moan about how over taxed they are. Time to look in the mirror, folks; you're doing some of it to yourself.

OK, I understand that these same taxpayers view overwithholding as a forced savings account. If they don't have the discipline to put money into a real, interest-paying account, the method is better than nothing.

But it's still a bad idea for the taxpayers and a great deal for Uncle Sam, who gets use of all that money all year long. And you can bet the IRS is earning some interest on your cash.

Pay yourself, not the IRS: So with this coming tax season looking like it might take even longer for you to get your hands on your refund, you might want to consider making some year-end changes to your withholding. In effect, you'll be giving yourself a short-term pay raise for December.

Making adjustments to your withholding is easy. You simply have to give your employer a new W-4 form. Your payroll office should have a new W-4 you can fill out, or you can download one from the IRS site.

On that document, you can put more money in your pocket instead of your IRS withholding account by increasing your exemptions. The key is to make the changes now so that they will be reflected in your final few paychecks of 2007.

And even with the change, at this late date you'll probably still get a refund anyway, since you've been overwithholding the other 11 months of the year. But at least for a paycheck or two, you and not the IRS will have a little more spending -- or saving -- money.

W-4 calculators: The IRS has an online calculator to help you figure out your appropriate amount of withholding. Even if you don't make changes now, in January think about adjusting the amount taken out of your paychecks so that your 2008 withholding will more accurately reflect next year's eventual tax liability.

Kiplinger's also has a withholding calculator, as does Paycheck City. And Your Money Page's calculator also factors in your state income tax withholding.


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Hernando Quevedo

I also beleive that is better to adjust overwithholding because thit can be a flag to get an audit from the IRS, that is better not to face.

Steve Austin

Delay on refunds, eh? Of course, there will be no corresponding delay on when you must file and make your underpayment (if you owe one). ;-\

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