Tax myths – a refund is not a bonus

March, 31 2014 by Carol Thompson, EA

A refund is NOT a bonus and a balance due is NOT a penalty.  When you began working, you filled out a W-4 stating how many exemptions you wanted.  If you are getting back too much money or are paying the government at the end of the year, chances are, you filled out your W-4 incorrectly.

For example, a couple is married and has three children. They both work, and both filled out Form W-4’s by following the instructions on the worksheet. They each included the other spouse and all three kids. That’s 10 exemptions.  When they file their tax return, they will have 5 exemptions on the return, but withheld as if it were 10. If they do not have other deductions, such as owning a house, it is possible they can end up owing money.

A W-4 is a guideline. It is not a rule. The best way to calculate withholding is to look at your total tax liability and divide it by pay periods.  Break-even is the tax liability divided by your pay periods.  People are paid in several ways:  weekly (52), bi-weekly (26), semi-monthly (24), or monthly (12).  Say your tax liability is $12,000.  You are paid semi-monthly, so divide $12,000 by 24 = $500 per pay period to break even.

You can now manipulate the withholding into a refund or take it right to break even.  (There are penalties for underpaying your tax.)  If you want a slightly larger refund, take fewer exemptions.  Better yet, go for break even and invest the money.

You can ask your payroll department for a new W-4 at any time. Don’t be afraid to change your withholding to fit your life. Those big refunds are great for paying bills, but if you had the money in your hand, you probably wouldn’t owe the bills to begin with.