Big Refunds! A Bad Thing?
by: Iowa Legal Aid
Almost everyone looks forward to a big refund each year. Should they? Probably not! A big refund means that the IRS gets to keep your money without paying you interest. Money you might need this month is going to Uncle Sam instead. Look at two ways that you might be able to boost your take home pay.
Example: Amy is a single mother with two children in elementary school.
Her budget for basics:
$400 rent
$150 utilities
$240 food
$50 clothes
$25 minimum credit card payment
$840 total bills
Amy's take home pay is $900. This leaves Amy $60 to use for anything else she may need. An emergency comes up and she may miss a credit card payment or be late on rent. Amy looks forward to her $2000 refund in February but by then she is facing a utility shut-off and is a month behind on her credit card. The late fees and extra interest add another $65 onto her credit card bill.
What can Amy Do?
Big refunds can be the result of claiming too few allowances on your W-4. To figure out how many allowances to claim you can go to the IRS Withholding calculator on line at
http://www.irs.gov/individuals/article/0,,id=96196,00.html
Amy, as a single mom, can claim 3 allowances. No federal tax will be withheld from her paycheck. Her monthly take-home pay will go up. Amy can most likely get the Advanced EIC credit in her paycheck. Her federal withholdings were $38 a month. Her EIC can be as much as $152 a month. Together her take home pay may increase by as much as $190 a month. The extra money can reduce her stress each month, maybe help her pay off her credit card sooner then expected or go into a savings account.
Taxpayers who get the Earned Income Credit (EIC) when they file taxes may be able to claim the Advanced EIC in each paycheck by filling out a W-5. Taxpayers who might want to consider filling out a W-5:
- 1 qualifying child; and
- Earn less than $35,463 in a one parent household; or
- Earn less than $40,463 are married, and plan to file a joint tax return. 2 qualifying children; and
- Earn less than $40,295 in a one parent household; or
- Earn less than $45,295 are married, and plan to file a joint tax return. 3 qualifying children; and
- Earn less than $43,279 in a one parent household; or
- Earn less than $48,279 are married, and plan to file a joint tax return. The maximum advanced credit that a taxpayer can receive for the year is $1,826.
The form has a checklist for you to use to help you decide whether you can get the advanced credit or not. Not everyone who can get the Earned Income Credit can get the Advanced Credit.
Things to keep in mind if you sign up for the Advanced Credit:
- You must file a tax return for any year that you receive the advanced EIC;
- If your income increases you may need cancel your W-5 ;
You will get a part of the EIC each month; and
- When you file your taxes, you will get any EIC you are entitled to that you did not get in your paychecks.
For more information on how to apply for the Earned Income Credit, contact Iowa Legal Aid. If you have tax problems, you may be able to get help from Iowa Legal Aid's Low-Income Taxpayer Clinic. Call Iowa Legal Aid at 1-800-532-1275.
| The information in this article was not intended or written to be used and cannot be used to avoid penalties under the Internal Revenue Code. |
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