Tax Refunds: Turn Yours into Cash Flow NOW

A few days ago I wrote about specific tax return errors that can trigger an IRS audit and how you can avoid them.

Thankfully most folk's tax returns are never audited.

But most folks get a tax refund. So far this year, over 45 million tax returns were filed requesting direct deposit, claiming tax refunds totaling over $145 billion.

When it comes to tax refunds, the trend has been that refunds have increased over the years. This year looks to be no different. According to the IRS, the average tax refund this year is about $3,100.

But getting a tax refund is nothing to brag about. You are simply getting money back that you gave the government because you overpaid your taxes.

Would you overpay your cell phone bill so that you could wait a year to get a refund of the overpayment? I don't think so!

But tens of millions of people - many of whom are in debt - over pay their taxes and wait a year to get their money back. And they are happy to do it!

If this includes you, what you should do is to reduce the current amount of taxes you have withheld from your pay by completing a new Form W-4 Employee's Withholding Allowance Certificate. Increase the number of withholding allowances you are claiming. If you file single and you typically get a $1,200 tax refund, then increase your withholding allowances from "Single and 1" to "Single and 4".

I suggest folks use the W-4 Calculator on the IRS web site to get a suggestion for their specific situation.

Once you figure the allowances needed to reduce your tax withholding, then file this form with your company's payroll department right away.

If you follow this advice, you'll increase your cash flow now and get a smaller tax refund next year.

Check back in a few days when I'll write about a few financial moves to consider with this year's tax refund.

Ray Martin

View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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