Get Next Year's Refund Now

Looking for extra cash? You can boost your paycheck by adjusting your withholding.

Most American workers can give themselves a tax cut much larger than the one being delivered by the Making Work Pay tax credit okayed by Congress earlier that year. That credit, a key part of President Obama’s economic stimulus plan, is worth $400 for individual workers and $800 for married couples. The potential do-it-yourself tax cut averages $2,700.

The new credit won’t show up on tax returns until next spring, but workers are enjoying the benefit right now in the form of reduced tax withholding from their paychecks. Most single workers saw withholding drop -- and paychecks rise -- by about $45 a month starting in March or April. For married employees, the boost is about $65 a month.

This story shows you how to get more!

Here's a happy little secret: Most taxpayers have the power to boost their paychecks ... without working a minute of overtime or getting a promotion. You’re in the lucky group if you're one of the 75% of Americans who get a tax refund year after year. In 2008, the IRS issued nearly 107 million refunds averaging $2,400. So far this year, the average refund is even more: $2,700.

If you're just "average," then, you deserve an extra $225 a month in your paychecks -- far more than is being delivered by the stimulus plan. Habitual refund receivers have every right -- and some might say a patriotic duty to help stimulate the economy -- to order the IRS to take less out of their paychecks.

All you have to do is file a new W-4 form, Employee's Withholding Allowance Certificate, with your employer to adjust the number of "allowances" you claim. You get one allowance for yourself, your spouse and each of your dependents, for example, and maybe extra ones if you itemize or claim certain tax credits.

Each allowance for 2009 basically makes $3,650 of your annual income off-limits for income-tax withholding. Claiming extra allowances on your W-4 will automatically decrease withholding and increase your take-home pay. You'll enjoy instant gratification from a do-it-yourself pay raise.

Full disclosure: Reducing or eliminating over-withholding will reduce or eliminate the tax refund you’ll get next spring. But, face it: It makes a lot more sense to get your money when you earn it, particularly in these tough economic times. And, if President Obama and the Congress think reduced withholding is a key to the national economic recovery, the least you can do is give them a hand.

Of course you can't just make up a number for your W-4. The IRS has a dense 19-page booklet with seven intimidating worksheets to guide you toward the right number of allowances to claim. The agency even offers a Web calculator to help. But it requires nearly 30 entries.

To make things less painful -- and to encourage taxpayers to set their withholding situation straight -- we've developed a simple, user-friendly calculator. Answer just three questions (you'll find the answers are on your 2008 tax return), and we'll give you a solid idea of how many more withholding allowances you should be claiming. It's based on the premise that your financial life in 2009 is going to be pretty much the same as last year.

Several things can affect the amount that should be withheld from your check: a new job, a new marriage, a new child, or a new house, to name a few.

But, if your financial life is shaping up to be pretty much the same this year as last, our calculator will instantly figure how many extra allowances you deserve. And, to give you the incentive to fill out that new W-4 and hand it to your boss, we'll show you how much extra money you'll add to your paycheck by claiming the appropriate number of allowances.

Avoid Costly Mind Games

Most experts who rail against over-withholding and the flood of refunds it unleashes complain about giving the government an interest-free loan. And there's no doubt that you're better off steering that cash into savings or investments that make you money. But there's something of more importance at work here.

Habitual refunds can play costly games with your mind and short-circuit meaningful tax planning. You've surely heard this joyous springtime comment: "Oh, I didn't owe any tax this year. I'm getting money back."

Of course, the gratified taxpayer probably paid thousands -- maybe tens of thousands -- of dollars in tax and simply recouped funds that had been overpaid. This delusion can inflict financial pain if it leads you to lower your guard to the tax consequences involved when you enter into financial transactions during the year, whether that's deciding which stocks to sell, whether to buy a rental property or whether to transform a hobby into a business.

The prospect of getting money back also can lead to laziness when you work on your return. There's a good chance you'll work harder to shave the amount of extra tax you owe than to pump up an already fat refund.