Big Refund or Big Tax Bill?
Revised By: Whitney Ibarra
The Henssler Financial Group Position Paper

As of December 28, 2007, the IRS reported they paid more than $246 billion in federal tax refunds to individual taxpayers in 2007. This money was distributed to almost 106 million filers, or about three out of every four returns filed. Simple arithmetic tells us that the average refund was slightly more than $2,300. The IRS expects these numbers to increase again this year.

So where does this money come from? It does not grow on trees, and it certainly does not appear by magic. It comes from us via the instructions we give our employers — deductions from our paychecks or estimated payments we submit to the government on four designated dates during the year.

The government tax system has been described as a "pay-as-you-go" system. The trouble is we "paid" more than we "went" — approximately $44 per week too much for the average taxpayer.

Many taxpayers view this overpayment as a forced savings. They like having a "nest egg" to look forward to in the spring before vacation time rolls around. What they do not consider is that this money has no interest paid on it. Regular deposits into a savings account, or using the extra money each month to pay down debt, would generate a far more positive change in their financial status. Rather, they allow Uncle Sam to hold the money interest free for the entire year. The greatest irony: When taxpayers want their refund immediately, but they have allowed the government to hold their money for the whole year interest free! So many taxpayers repeat the same process year after year.

Still, many fall on the other side of the coin. When people prepare their taxes, they find that the IRS wants more than they paid. Many taxpayers not only have to pay additional money to the government but a penalty, too. How does this happen? Changes in exemptions and deductions can cause unexpected increases in tax liability. Income that must be reported, but does not have withholding tax paid on it, can cause a shortage if estimated payments are not accurately computed.

Since it is early in the tax year, now is the time to assess your situation and adjust if necessary. If the government is holding more of your money than you want them to, complete a new W-4 with your employer to decrease the amount withheld from your paychecks. If you owed more than you could comfortably pay, consider adjusting your withholding or estimated tax payments now. There is still time to pay your tax liability without much pain.

As always, if you have any questions, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.