Tax Refund or Government Loan?

It’s certainly nicer to get an income tax refund than have to pay additional taxes. However, if you are getting a large refund, you might want to consider changing the number of exemptions you are claiming on your W-4 form.

Some people who have difficulty saving money like the idea of claiming fewer exemptions than they are allowed. That way more is taken out of their paycheck each pay period, and at the end of the year, they receive a large tax refund. It is their own personal savings plan.

However, what is really happening is that they are loaning money to the government without charging interest. At the end of the year, they get back only the money they loaned. If they had instead taken that money and invested it, they would have more than when they started.

If you are one of these people and would like to change your withholding taxes to more accurately reflect your actual tax liability, the IRS website has a calculator to help you here: http://www.irs.gov/individuals/article/0,,id=96196,00.html