I am getting big refund on tax return, am I smart?

No, most likely you are not! In fact you have lost some money if you are getting money! Some of you won't believe this comment.

I see lots of people feel lucky or smart if they are getting refund from IRS. Or some people compare with others and feel sad if others are getting refund and they are not.

You are getting refund means you overpaid to IRS! And that money was sitting with IRS interest free i.e. you gave loan of your money (refund) to IRS at 0% interest till get refund!

You could be smart if you keep refund or owing IRS amount below $500. This can be achieved predicting your income for each tax year at start of the year. For salaried person, Form W4 decides how much tax is withhold by employer. Click here for Form W4.

In case of salaried employee, at start of each year always try to fill up Form W4 worksheet to see if anything changing for that year.

But some time you get unpredicted one time income like capital gain gain or bonus. In that case you can still refile form W4 again to adjust the tax withholding!

Remember just filling up exemptions number (page 1 of form W4) does not mean you are done. Especially for married joint tax return case, you better do the full worksheet on page 2 & 3 of Form W4 and then decide exemptions number and even you may have to cut extra tax from salary with zero exemptions! This is normally true when a person is earning low salary compared to its spouse.


Use this IRS Tax withhold calculator:
http://www.irs.gov/individuals/article/0,,id=96196,00.html