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Big Refunds! A Bad Thing?

Authored By: Iowa Legal Aid LSC Funded

Information

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. Here is a way 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. Her federal withholdings were $38 per month. No federal tax will be withheld from her paycheck when she adds allowances. Her monthly take-home pay will go up. 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.

For more information 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.

As you read this information, remember this article is not a substitute for legal advice. 

As a general rule, Iowa Legal Aid’s Low-Income Taxpayer Clinic does not prepare tax returns.

Last Review and Update: Nov 29, 2011
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