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SPECIAL: The Tax Adjustment Danger Zone – Part 1

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Donell EdwardsDonell Edwards, Blogger

About Donell Edwards: Donell Edwards is President of CWR Media and is also founder and publisher of The College World Reporter (CWR) magazine and CWR World News & Information Service.  He is also a professional speaker, freelance writer, and entrepreneur.

 

 

Know Your Money
Wednesday – April 2, 2014

SPECIAL:  The Tax Adjustment Danger Zone – Part 1  
Why Getting A Tax Refund Is A Bad Thing
By Donell Edwards

 

Today’s post is about a topic that is somewhat controversial, adjusting tax withholdings so that when taxes are filed there should be little or no refund and little or no amount due.  Why is this topic controversial, and why does the title of this post indicate that it is a dangerous area?  These questions will be answered in due time in this post.

I had planned not to write this post until further along in our money management process.  However, since it is tax season and because this is such a very important topic, I decided that now is the time for this discussion.  Because of the importance of the subject, it will also be discussed in future posts.

First of all, what do we mean by adjusting tax withholdings to ensure that only what you owe should be withheld.  Most people are familiar with IRS form W4 shown below:

Form W4-1

According to research that I have conducted the consensus among most financial advisers is that having too much taxes withheld, regardless of the reason, is not smart money management.  Even the Internal Revenue Service urges taxpayers not to have excess amounts withheld from payroll checks and use this as a “forced savings” method.   The argument is that the money from excess tax withholdings could be put to better use in the personal or family budget.  The money could be used to pay down debt, make investments, or do a number of other things that would be more conducive to good money management.

So, where is the controversy?  The controversy is that some who have attempted to make adjustments to their withholdings in order not to pay in too much have actually experienced not paying in enough and in addition to having to pay back taxes when they filed, were also hit with additional penalties.  Others say they receive government assistance, and if their income were increased as a result of adjusting their payroll withholdings, the increase in income would result in making them ineligible to receive assistance they need and currently receive, and make it difficult for them to meet their expenses.  Still others feel that they would not have the willpower to use the additional money in their regular paychecks wisely, and would gain no real advantage over receiving the larger amount annually through the refund check.

These are certainly valid reasons that cause some to think they are better off receiving a large sum through the refund once a year, rather than receiving a smaller amount through an increase in take home pay each payday.

There are also reasons that venturing into this area is a danger zone for the following reasons:

  • People who are unqualified making the adjustments themselves incorrectly, resulting in having to pay taxes back at the end of the year.
  • People allowing someone else who is not qualified whom they trust to make the adjustments instead of consulting with a reputable tax professional.
  • Not keeping accurate records to estimate adjustments on the Deductions and Adjustments Worksheet (which many are unfamiliar with).
  • Doing everything right and then wasting the additional income gained rather than using it to improve overall personal or family finances.

One of our goals in writing this blog is to help educate readers so that they understand all of the many facets involved in sound money management and increasing cash flow.  Among the methods of increasing cash flow are, monitoring and controlling spending, debt elimination, having a home-based business, and reducing taxes.  For the average person adjusting tax withholdings can result in a minimum of an additional $200 – $300 a month.  So, realistically, would most people be better off with a large sum they receive once a year, or what amounts to a sizeable increase in monthly income?

As we have attempted to explain, in some cases there are valid reasons for concern about adjusting tax withholdings, and there may be dangers if not properly adjusted by an experienced tax professional.  Additionally, some may lack the willpower to use the additional income wisely.  However, it is our position, and conventional wisdom is on our side, that the money wise thing to do is to have whomever does your taxes to help you correctly adjust your withholdings, including completing the Deductions and Adjustments Worksheet if you meet the qualifications.  Do not attempt to do this yourself, use a certified and reputable tax preparer.

If you are afraid that you would waste the additional income gained from making the suggested adjustments in withholdings, keep reading our blog, we are here to support you and if you apply what is written by myself and our contributors to help you develop the willpower to resist temptation, you will stay out of the “Danger Zone.”

Be sure to read the two articles in our Suggested Reading section below:  The Case Against Receiving A Tax Refund, and IRS Offers Tips to Reduce Big Refunds and Prevent Tax Bills.

 

Are You A Spendaholic?  Send Us Your Confessions:
If you would like to share with our readers how “bad” spending habits have affected you, anonymously or otherwise, for our upcoming special, “Confessions Of Spendaholics,” please send your experience to comments@knowyourmoneyglobal.com.

 

Suggested Reading:
The Case Against Receiving A Tax Refund
http://tinyurl.com/kymtaxrefundpost

IRS Offers Tips to Reduce Big Refunds and Prevent Tax Bills
http://tinyurl.com/kymirsrefundadvice

 

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