Are You Making 0% Interest Loans to Uncle Sam?

Did you receive a large tax refund this past tax season? If so, that probably made you pretty happy, right?

What if the question was re-phrased, though, as, "How would you like the opportunity to make a zero percent interest loan to Uncle Sam?" There is no one jumping at that opportunity, is there? In essence, by having too much tax withheld from your paycheck, you are making an interest-free loan to the government.

Now, how do you feel about that big refund check?

It may be an odd time of year to be discussing income taxes, but this situation can affect a wager-earner all year long. So, if you commonly feel like there is "too much month left at the end of your paycheck" then you may consider changing your situation, so you not only have more money available to you at each payday, but you also stop resorting to credit cards or payday loans, which both likely will cause you to incur high interest and finance charges.

Yes, for some this is a "forced savings" plan of sorts, which they do not want to change. There also may be life or financial changes that some may be anticipating or already know about in the next tax year that will affect their tax situation to the better or worse, such as a marriage, divorce, birth of a child, death of a spouse, job change, etc. If you have the self-discipline needed and you believe your tax bill will be similar to last year's, though, you may consider changing the exemptions and withholding amounts from your paycheck.

To do this, you should request a Form W-4 from your employer's human resource department. When you receive this form, you should make the necessary changes to get your refund for the year as close to zero as possible. There are several withholding calculators on the internet, including ones on tax preparation and personal finance websites, which may help you to re-examine this form. If you need help, ask a tax preparer to assist you with the calculations.

So what is Form W-4? If you do not recognize this form, you most likely completed it on your first day on the job -- and you've now long forgotten it. Possibly when you first started in your position, the taxes being taken out were adequate, but as your life and job changed, the withholdings became too large. Life-changing events, such as a major job promotion, marriage, divorce, and the birth or adoption of children can change your tax situation.

Of course, it should go without saying that if you take more money "along the way" through each paycheck, you will not receive as large of a tax refund check afterward, but you will get to use this money throughout the year, and you will not have to resort to borrowing money that you should have had to spend in the first place. It can be a smart approach to "finding" more money each month, while only having to fill out a simple form at work to get it.