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Here’s why you shouldn’t celebrate that big tax refund

The IRS issued 45.5 million refunds through Feb. 28, with the average refund check totaling $3,064.

Tax refunds are a return of the money you overpaid in taxes during the prior year.

Find out how much you paid in taxes in 2019 by checking line 16 on your Form 1040.

Think twice before celebrating that large refund check from Uncle Sam.

The IRS had doled out 45.5 million refunds as of Feb. 28, with the average refund check totaling $3,064. That amount is just $4 less than last year’s average refund.

Filers have reasons to celebrate their small windfall. Most have ambitious plansfor their small windfall, including shoring up their savings and paying off debt.

Here’s the downside of getting a large check from the IRS: It means you voluntarily overpaid the taxman last year.

“Most people are really happy about the refund because it’s money going back to them,” said Sean Stein Smith, CPA and member of the American Institute of CPAs’ financial literacy commission.

“But any refund you’re getting back is because you had too much tax withheld from your paycheck during the whole year,” he said.

Where’s the refund coming from?

Whether you owe Uncle Sam or get money back in the spring will depend on a document your employer has on file, known as a Form W-4 or an employee’s withholding certificate.

Employers use this form along with the tax withholding tables to figure out how much income tax to pull from your paycheck.

The W-4 considers the number of dependents you have in your household, your filing status, income you generate and whether you’re claiming the standard or itemized deductions on your tax return.

Arriving at the ideal level of income tax withholding is as much art as it is science.

If you withhold far too little, you take home more money with each paycheck, but you run the risk of owing the IRS the following year.

If you withhold too much, you’re giving Uncle Sam more money than necessary. This gives you good odds for a large refund in the spring, but a smaller paycheck in the meantime.

It’s also worth noting that after the Tax Cuts and Jobs Act took effect in 2018, the IRS overhauled Form W-4 and its withholding calculator to reflect major changes to the tax code.

These changes include the roughly doubled standard deduction, the elimination of personal exemptions and new curbs on itemized deductions.

Aiming for zero

Zero is the magic number for taxpayers.

The IRS’s withholding calculator can help you tailor your tax withholding so that you’re close to matching your federal liability.

The amount of taxes you pay to your state might be a different story, so talk to your tax professional to make sure you’re paying just the right amount.

“In an ideal world, your income taxes withheld from paychecks should cover your income tax liability for that year,” said Smith. “Ideally your refund or additional taxes owed should be zero or as close to zero as possible.”

Source: Darla Mercado @ CNBC

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