ElectroFile Income Tax Service   Income Tax Service   Terry Hough, President
Terry Hough

The following is an article by Jeff Schnepper from his MSN Money columns.

I've written and preached this message to our tax clients for years and I couldn't agree more. Yet many folks continue to think that a big tax refund is a good thing.

No, tax refunds are BAD!

Be sure to talk with your tax consultant here at ElectroFile Income Tax Service about getting your Federal and State tax withholding properly set. They will assist you in creating an accurate Form W-4, NC-4, or VA-4 to file with your employer.

Don't let the government use your money interest free!

Put it in your pocket, the bank, or I'll make you the same deal that Jeff offers below.

Terry Hough

By Jeff Schnepper

Image: Jeff Schnepper

Jeff Schnepper is the author of the best-selling book "How to Pay Zero Taxes", which is in its 28th edition. He is a former professor of taxation, accounting and finance. Schnepper now has a full-time tax planning and legal practice in Cherry Hill, NJ.

Why I hate income tax refunds

That big, fat tax refund really means you've given the government an interest-free loan. It's far better to keep the money you earned in the first place.

Refunds: They're wrong!

It's hard to get that through to my clients. But refunds are bad.

Sure, it's exciting to get a check from the Internal Revenue Service. Well, actually, it's from the Treasury, but you know what I mean. That misses the point, however.

It's not like you're gaining anything. That money was always yours. The feds are just giving it back. And that's the point.

When you get a refund, what that really means is that you've given the federal government an interest-free loan. You're just getting your money back.

In fiscal 2009, more than 96.7 million Americans received tax-refund checks, with an average refund of $2,683, up slightly from the year before. No matter how you do the math (for those without calculators, it's more than $259 billion), that's a whole lot of interest-free dollars.

An offer you can't refuse?

People just don't learn. They want that check from the government. But I can give you the same deal.

I hereby offer to allow anybody reading this to send me money. I'll take cash, checks, money orders, even food stamps. Send me as much as you want. And I promise -- on my word as MSN Money's tax expert -- that I'll send it back to you on April 15, without interest.

It sounds silly when you put it that way, doesn't it? But it's no different than getting a tax refund from the IRS.

Some people argue that refunds are a great way to save money. If they never see the dollars in their checks, it's easier to put aside money for, say, that big-screen plasma TV they've been drooling over.

Open your eyes, financial fool! That's what payroll savings deductions are designed to do. Increase your retirement-plan contributions. Buy savings bonds. Or just put an extra $50 per paycheck into a money-market fund.

Here's what I'll do. I'll up the ante on my original deal. Not only will I give you your money back, but I'll add a whopping 1% to your original contribution. That's more than money-market funds are paying. You can't beat that kind of deal.

Aim to withhold just enough

If I can't entice you with my "deal of the decade," what should you do?

Aim for the safe harbors. That's the minimum amount you have to pay during the year to avoid any interest and penalties. There's no interest or penalty if any of the following apply when you file your return on April 15:

If your adjusted gross income (Line 37 on your Form 1040 for 2009) was more than $150,000, you need to pay 110% of your total tax, rather than 100%. So if my 2009 adjusted gross income was $160,000 and my total tax was $10,000, I'd need to pay 110% of that, or $11,000, during 2010 to hit that safe harbor. If I do that, there's no interest or penalty to pay, regardless of how much I owe on April 15, 2011.

If you're paying through withholdings, they are deemed to be paid evenly during the year, regardless of when they are remitted. I have some clients who have nothing withheld during the first 10 months and then meet their safe harbors with November and December withholdings.

If you're making estimated payments, they need be equal or, if your income varies substantially during the year, proportional to the income earned during each quarter. So on a simplistic basis, if I have $100,000 in income earned and $40,000 was earned in the first quarter, I'd need 40% of my tax paid in during that quarter. Technically, it's called the annualized income installment method, and it's a bit more complicated than my example.

If you expect to owe additional taxes April 15, it would be prudent to put those dollars into a money market fund (or send them to me) until needed. At least that way, as opposed to increasing your payments to the IRS, you'll get the interest. Just make sure you hit one of the safe harbors.

And don't get any more big refunds. Refunds are BAD! BAD! BAD! Trust me on this.