About this time every year some people are probably concerned that they will need to make a large tax payment to the IRS. This could be stressful depending on the status of your finances. Some may not be able to come up with the money required to pay the IRS and end up taking on debt to make the payment. Other people might be looking forward to receiving a large tax refund. While it feels better to receive a refund, you probably could put the money to use. A few people probably have paid just enough through out the year to either owe a little or to receive a small refund. This is the position that everyone should strive to be in on April 15th.
In 2006 the average tax refund was $2,237 and for those that had their refund deposited directly to their bank account the average refund was $2,607. This works out to almost $186 dollars a month of extra tax payments.
Interest Free Loan for the Government
The extra payments to the IRS are a loan to the government in which the lender (you the tax payer) receives nothing in return. The tax refunds are payed back with out interest. If one were to reduce the amount paid to the IRS every month, the $180 plus dollars could be invested to your benefit and yield a higher return. For example if you took the $180 every month and put it into a money market account with an interest rate of 4%, at the end of the 12 months you would have $54.71 dollars in interest income and a return of 2.3% on your total investment.
| Deposits… | |
| Initial investment: | $180.00 |
| Periodic deposit amount: | $180.00 |
| No. periodic deposits per year : | 12 |
| Deposits made at beginning of period? | TRUE |
| Investment Period… | |
| Length of investment (years): | 1 |
| Interest Rate… | |
| Annual interest rate: | 4.00% |
| Calculations | |
| Initial investment | $180.00 |
| Additional deposits: | $2,160.00 |
| Total amount invested: | $2,340.00 |
| Periodic interest rate: | 0.33% |
| Value of investment at end of term: | $2,394.71 |
| Interest earned on investment: | $54.71 |
| Return on investment: | 2.3% |
If you could take the entire amount of money you would have overpaid to the IRS and invested it in a money market account with an interest rate of 4%, at the end of the 12 months you would have $95.34 dollars in interest income and a return of 4.1% on your total investment.
| Deposits… | |
| Initial investment: | $2,340.00 |
| Periodic deposit amount: | $0.00 |
| No. periodic deposits per year : | 12 |
| Deposits made at beginning of period? | TRUE |
| Investment Period… | |
| Length of investment (years): | 1 |
| Interest Rate… | |
| Annual interest rate: | 4.00% |
| Calculations | |
| Initial investment | $2,340.00 |
| Additional deposits: | $0.00 |
| Total amount invested: | $2,340.00 |
| Periodic interest rate: | 0.33% |
| Value of investment at end of term: | $2,435.34 |
| Interest earned on investment: | $95.34 |
| Return on investment: | 4.1% |
IRS Withholding Calculator
The IRS website offers an easy way to determine the amount of tax that should be withheld from each paycheck. The calculator can be found here > IRS Withholding Calculator (as of the date this post was published the calculator was unavailable). The calculator is easy to use and all you need is your tax return from the prior year and your most current pay stub(s). After completing information on your income, tax credits and taxes paid to date, the output will help you complete a new W-4. By running this calculator at the beginning of the year and at the end of each quarter, you should be able to fine tune your tax payments to minimize either your tax payment or tax refund.
Information on the Withholding Calculator from the IRS website:
The purpose of this application is to help employees to ensure that they do not have too much or too little income tax withheld from their pay. It is not a replacement for Form W-4, but most people will find it more accurate and easier to use than the worksheets that accompany Form W-4. You may use the results of this program to help you complete a new Form W-4, which you will submit to your employer.
Tips For Using This Program
- Have your most recent pay stubs handy.
- Have your most recent income tax return handy.
- Fill in all information that applies to your situation.
- Estimate values if necessary, remembering that the results can only be as accurate as the input you provide.
- Consult the information links embedded in the program whenever you have a question.
- Print out the final screen that summarizes your input and the results, then use it to complete a new Form W-4 (if necessary), and keep it for your records
Who Can Benefit From This Application?
- Employees who would like to change their withholding to reduce their tax refund or their balance due;
- Employees whose situations are only approximated by the worksheets on the paper W-4 (e.g., anyone with concurrent jobs, or couples in which both are employed; those entitled to file as Head of Household; and those with several children eligible for the Child Tax Credit);
- Employees with non-wage income in excess of their adjustments and deductions, who would prefer to have tax on that income withheld from their paychecks rather than make periodic separate payments through the estimated tax procedures.
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