Controlling Your Tax Refunds with Payroll DeductionsDo you get annual tax refunds? Conversely, do you regularly owe tax when you file?

If you receive regular tax refunds, you're letting the government keep your money and earn interest with it for them throughout the year. (Not good).

And if you owe money (over $1,000 that is), then you have to pay extra interest to the government! (Also, not good).

Neither case is ideal, and there's a way you can control this with payroll deductions.

Do you get Annual Refunds?

Although you'd think annual tax refunds would be preferable to owing tax, there are a few reasons why it's not so good:

  • People rarely spend tax refunds in a financially constructive way. In the splurge vs save debate, splurging often wins.
  • That tax refund is actually your money that the government is giving back to you! Wouldn't you rather have it to do with as you please throughout the year?

Reasons for Tax Refunds

You get a tax refund because you've paid too much tax throughout the year. Your employer deducts tax from your paycheck based on your annual income, but this doesn't account for various deductions and credits that might lower your taxable income. 

And sometimes, employers simply miscalculate the amount of tax to deduct from your pay. Nothing is infallible. But you can adjust this easily enough.

Do you Regularly Owe Tax?

What a nasty surprise to owe tax. If you aren't prepared, you can get into trouble too. But owing tax can be both good and not good:

  • If you owe more than $1,000 in taxes, the government charges extra interest penalties on the amount owing. Ouch. (Sadly, they don't reciprocate on this arrangement either).
  • If you only owe a small amount of money though, and have saved in advance for it, you have the satisfaction of having control of your own money throughout the year (including earning interest with it). Owing tax can be a non-event if you're prepared.

Reasons People Owe Tax

You might owe tax for a few reasons:

  • You have extra income (a part-time job or freelance work) that isn't taxed properly (or at all).
  • You have investment or rental income that isn't taxed.

Your employer has miscalculated the amount to deduct from your pay.

Having Extra Tax Deducted from Payroll

I've met people who actually adjust the amount of tax deducted from their pay for the sole purpose of knowing they'll get a tax refund at the end of the year. Although it's an effective forced savings plan, you can just as easily set up automatic deductions into a savings account yourself, thus allowing you to earn income with your money and have more control.

The only time I suggest having extra tax deducted from payroll is to avoid owing money when you file your taxes.

Calculating and Adjusting Your Tax

By submitting a Form W-4 to your employer, you can adjust the amount of tax they deduct from your paycheck. But first, check out these calculators to determine what adjustments you need to make (if any):  

Payroll Deductions Calculator

IRS Witholding Calculator

W-4 Tax Calculator

Estimate Your Tax Refund Calculator

Related Blogs: 

Splurge or Save? A Tax Refund Dilemma  

Trying to Get That Tax Refund 

Is there a Tax Refund in Your Future? How to Use it Responsibly

Nora Dunn Life Balance Blogger Careone Debt Relief ServicesNora Dunn

Nora Dunn is The Professional Hobo: a full-time traveler and freelance writer. She is a contributing writer under the CareOne Debt Relief Services Life Balance blog. Having sold her business and belongings to travel, she has been on the road since 2007. She travels in a financially sustainable manner, taking advantage of creative volunteering positions. As a former certified Financial Planner, she is financially responsible for her actions along the way. She believes there is a fine balance between planning for tomorrow, and living for today. Compensated Blogger for CareOne Debt Relief Services. You can follow Nora on Twitter @hobonora

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